Bullish Monsanto Company Trading At A Discount

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Monsanto (NYSE:MON) provides agricultural products like seeds, herbicides and biotechnology trait products that are used by farmers globally to improve productivity; reduce costs of farming and  get better quality of food and feed. During the previous year, the company generated 54% of total revenue from USA and balance from the rest of the world.

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GROWTH TRIGGERS

As the world population grows, the demand for food will increase but, the supply of arable land will be limited. This will increase the demand for the products that improve productivity. The company will also be benefited from strong product pipeline and increase in demand for modified products that are more resistant to insects and bad weather.

The other triggers for growth during the next year are new products like pest resistant INTACTA RR2 PRO Soybeans in Latin America and DroughtGard, a drought-resistant corn variety. The huge increase in prices of corn and soybean due to drought conditions will also benefit the company. Furthermore, as per United States Department of Agriculture report, total acres for corn and soybean is expected to increase 37% and 25% respectively during 2013 as compared to 2012.

VALUATION

Our DCF valuation provides intrinsic value of $106.80 for each share of the company.  Using WACC of 7.8% as the discount rate; we obtained DCF stream of $22,073 million and terminal value of $31,241 million assuming terminal growth rate of 2%. After adjustments for net debt and financial assets, we obtained value of equity at $56,919 for 533 million shares of the company. To calculate WACC, we used Beta as 1.51, risk-free rate as 1.65% and market risk premium as 4.1%.

RISKS

The major portion of revenue of Latin American businesses is coming from corn. Any shift by farmers to soybean may affect performance in this region. Unfavorable decision in US Supreme Court regarding planting restrictions on genetically modified seeds sold by the company can affect the soybean business. Soybean business contributed 13% of total revenue during 2012.  The Roundup herbicides and some other herbicides products of the company are expected to face competitive pressure.

COMPETITORS

According to Jim Prokopanko, Mosaic’s (NYSE:MOS) President, challenging weather conditions and soft demand in India and China were the main drivers of slow sales volumes. Deliveries in North America were negatively affected by the low Mississippi river levels, one of Mosaic’s key barge routes.

For the next quarter, Mosaic expects potash sales volumes to range from 1.6 to 1.9 million tons. Phosphates sales are estimated to reach from 3.0 to 3.4 million tons. The operating rate for the potash segment is estimated to exceed 70 percent of operational capacity. The operating rate at the company’s phosphate operations is expected to be above 80 percent of operational capacity.

Overall, the most recent financial results demonstrate a dubious performance. Nevertheless, Mosaic‘s past operating activities have provided it with capital adequacy. Historical data from 2005 to 2011 indicate an average operational cash flow growth rate of 78.96 percent. Mosaic’s capital strength is also evident by the low LT debt-to-equity ratio compared to its peers. Moreover, the company has a powerful distribution network, which enhances its global presence. It operates 24 facilities spread around North America, Brazil, Argentina, Chile, Mexico, India, Thailand and China.