Is Monsanto Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Monsanto fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Monsanto's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Monsanto's key statistics:


MON Total Return Price Chart

MON Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

41.6%

Pass

Improving profit margin

73.8%

Pass

Free cash flow growth > Net income growth

401.1% vs. 146%

Pass

Improving EPS

152.5%

Pass

Stock growth (+ 15%) < EPS growth

122% vs. 152.5%

Pass

Source: YCharts.
*Period begins at end of Q2 2010.

MON Return on Equity Chart

MON Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

103.6%

Pass

Declining debt to equity

(37.2%)

Pass

Dividend growth > 25%

41.5%

Pass

Free cash flow payout ratio < 50%

34.7%

Pass

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Monsanto comes through with a flawless performance, earning only the third perfect score ever awarded after an analysis of well over 200 stocks. Everything is moving in the right direction, and the only argument one could feasibly make against Monsanto's fundamentals is that its free cash flow spiked early in the tracking period and has not made much progress since 2011. However, current free cash flow levels are more than adequate to sustain Monsanto's dividend, and the company's share price has not escaped from its earnings growth. However, Monsanto remains embroiled in a ferocious worldwide controversy, the outcome of which is yet to be determined. Will Monsanto continue to be one of the market's strongest stocks, or is this company doomed to wilt unexpectedly on the vine? Let's dig deeper to see what the future holds.

Regulatory bodies around the world -- with the notable exception of the United States -- have enacted legislation that may have a huge impact on genetically modified seed companies such as Monsanto, DuPont , and Syngenta . These new laws range in severity from a requiring stricter labeling requirement to an outright ban on GM crops. Fool contributor Jacob Roche notes that several major international scientific groups have found GM crops to be safe, but several countries have outlawed their cultivation regardless.

Consequently, Monsanto has discontinued its pursuit of regulatory approval for a number of its newer seeds. Rivals DuPont and Syngenta will continue with the approval process, which could put Monsanto at an international disadvantage if its competitors' seeds wind up as the approved plantings of choice internationally. Fool contributor Rich Duprey notes that Monsanto has decided to focus on its conventional seed products in Europe after withdrawing from efforts to cultivate eight out of nine GM crops on the continent. Rival Syngenta is also combating the European Union's ban on its pesticide thiamethoxam, which is assumed to be responsible for honeybee Colony Collapse Disorder. This pushback could backfire as a public-relations fiasco, but Monsanto remains very much the focal point of anti-GM activists, so its competitors may be able to simply slide under the radar despite engaging in similar behaviors.

Since Europe has effectively banned the use of GM crops for the time being, seed and chemical companies are looking toward Africa, which has long been intransigent in its decision to introduce GM crops. Rich Duprey notes that Burkina Faso, Egypt, South Africa, and Sudan are the only four African countries that have permitted commercialized GM foods. Last year, Monsanto acquired two seed companies, Sensako and Carnia, which now account for half of the South African maize (corn) market. On the other hand, DuPont's Hi -Bred division acquired an 80% stake in Pannar Seedto expand into the GM maize market, which accounts for around 75% of the crops grown in South Africa. These acquisitions face strong resistance in the region, as Monsanto and DuPont together will effectively take complete control of the planting of a domestic staple food.

On the other hand, Fool contributor Neha Chamaria notes that Monsanto is poised to reap significant profits from the Latin American primary crop planting season. Monsanto has recently launched its first-ever South American exclusive biotech trait -- Intacta RR2 PRO soybeans -- in Brazil, which offers a 100-million acre opportunity. In addition, the company is expecting promising results from its Genuity corn traits in Argentina.

Putting the pieces together
Today, Monsanto has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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The article Is Monsanto Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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