Monsanto (MON, Financial) is in news off late because of its bid to acquire swiss-based seed and farm chemical maker Syngenta AG. While Syngenta has rejected Monsanto’s initial bid, it is likely that Monsanto will sweeten its bid for the company. Both companies have annual revenue in the range of $15 billion. According to Monsanto, the combination of both the companies will help realize significant synergy cost savings, enhance research and development and offer farmers a more diverse range of products and services. If this deal goes through it will be a positive for both the companies. However, even without this deal, Monsanto’s stock looks undervalued and I believe it is a good buy. According to Gurufocus DCF calculator, the company’s stock is undervalued by 10%.
Here’s a look at the company in detail.
Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Monsanto’s seeds, biotechnology trait products, herbicides and precision agriculture tools provide farmers with solutions that help improve productivity, reduce the costs of farming and produce better foods for consumers and better feed for animals.
Monsanto manages its business in two segments: Seeds and Genomics and Agricultural Productivity. Through the Seeds and Genomics segment, Monsanto produces leading seed brands, including DEKALB, Asgrow, Deltapine, Seminis and De Ruiter, and Monsanto develops biotechnology traits that assist farmers in controlling insects and weeds and precision agriculture to assist farmers in decision making. Monsanto also provides other seed companies with genetic material and biotechnology traits for their seed brands. Through the Agricultural Productivity segment, the company manufactures Roundup and Harness brand herbicides and other herbicides.
The company has seen a good growth in the recent past and its adjusted EPS has increased from $3.78 in FY2012 to $5.23 in FY2014. According to sell side estimates, the company’s EPS is likely to further increase to $5.77 in FY2015 and $6.70 in FY2016.
The company has also done a good job in returning cash to the shareholders through dividends and buy backs. The company has announced a $6 billion accelerated buyback program last year. In addition, the company has a healthy forward annual dividend yield of 1.70%.
Going forward, the company continues to attract and pursue significant licensing opportunities. The company has strong product pipeline and earlier this year Citi analyst P.J. Juvekar said that Monsanto’s Roundup Xtend crop system for soybeans "could be the largest biotech launch in MON's history." He has a target price of $145 on the stock.
The company reported its 3QFY2015 earnings early in April. While the earnings were lower than expected, most of the analysts have maintained their bullish view on the company.
Credit Suisse (CS) analyst Christopher S. Parkinson, who has $141 target price on the company, noted,
"MON reported adj F2Q15 EPS of $2.90 beating our $2.85 est, but slightly missing the $2.93 consensus. Adjustments on the quarter include $0.02 of income from discontinued operations. The primary miss to our estimate resulted from weaker corn revenues, partially offset by a slightly higher margin. MON expects full-year results will be at the low end of the $5.75-$6.00 guidance range, which we view positively as expectations were for a reduction given FX headwinds of $0.35-$0.40/shr (prior $0.15-$0.20/shr). After adjustments to our model, we est. '15 EPS of $5.80 (from $5.85), while our '16 est. goes to $6.90 (from $7.05). Our $141 TP remains unchanged."
Deutsche Bank (DB) analysts also maintained a Buy rating on the company saying “what Monsanto can control it is controlling and doing so at exceptionally high levels." They were pointing toward the company’s new product launches, cost control and "aggressive use of its unlevered balance sheet for share buybacks."
Monsanto is trading at a forward PE of 17.81. Its earnings are growing in double-digit range in spite of forex headwinds. Out of 25 analysts covering the stock, 18 have buy ratings, six have hold ratings and only one has an underperform rating. I believe the stock is a good buy at current valuation given its reasonable valuations and good long-term growth prospects.
