Inside Wall Street: An Agribusiness Stock With Robust Growth Prospects

Gene Marcial's Inside Wall Street
Gene Marcial's Inside Wall Street

Once an unknown company to most U.S. investors, Syngenta (SYT) has blossomed and flourished as one of the world's leading agribusiness companies, with a hefty 19% global share in the multibillion-dollar crop-protection market and 11% in seed production. And its stock has streaked to all-time highs in February as it rivals older, big-name competitors DuPont (DD) and Monsanto (MON).

Switzerland-based Syngenta is one of my favorites because of its impressive robust growth story -- and a stock that has continued to climb every year since I first wrote about it for BusinessWeek on Mar. 13, 2006, when it was trading at $28 per American Depositary Receipt (ADR). It has rocketed since to $65 on Feb. 25, after hitting a record high of $67.35 on Feb. 9. Wall Street bulls believe it will keep climbing -- perhaps to $75 or more in 12 months. A total of 11 analysts follow Syngenta, with six recommending a buy and the rest sticking to a hold rating. None advocates selling the stock.

Industrial Corn for Ethanol

Not many companies can boast of such a stunning performance -- especially in the field of agriculture. Prospects are even sunnier ahead as grain and commodity prices continue to escalate. With operations in more than 90 countries, Syngenta is a leading producer of crop-protection products used on a wide variety of crops -- herbicides, insecticides and fungicides -- as well as in fruits, vegetables and flowers. .

The company also develops and invests heavily in research and development to come up with genetically modified seeds. On Feb. 11, the U.S. Department of Agriculture approved one of its products, a genetically enhanced corn, for use in the making of ethanol. Using this "industrial" corn for producing ethanol increases output and reduces the water, energy and chemicals previously needed. Syngenta is taking steps to make sure the special corn doesn't get into the food supply.

Such specialized farm products reflect the innovative spirit at Syngenta. "As a key provider of crop chemicals and seeds, we think Syngenta will benefit as declining arable land per person and rising income levels lead to increased demand for agricultural inputs over the long run," says Jeffrey Stafford, analyst at investment research outfit Morningstar, in a report on the company. Over the short run, he adds, "high crop prices and excellent farmer economics should lead to solid results."

Soybean Yield Increases of 50%

Indeed, with Syngenta's record of innovation, the company has established a "prime position in crop-protection products," observes Stafford. Part of the novel efforts at Syngenta is its recent change in strategy that fully integrates the company's crop-protection and seeds operations. That allows Syngenta to offer farmers a single package and expert advice with both crop-protection and seeds for their specific needs, tailored to their local conditions.

The combined approach not only reduces the cost to the farmer but also results in more efficiency and productivity, explains Syngenta Chief Operating Officer John Atkin. And the single package saves farmers time because just one Syngenta representative offers the two products and combined expertise in one meeting, he adds. At the same time, the integration saves Syngenta about $600 million a year.

The strategy has been in operation in some countries, such as Brazil, the second most important market for Syngenta after the U.S. He says some Brazilian farmers have been able to increase their soybean yield by 50% over their average output. Such results have thus convinced the company to apply the integrated-package strategy worldwide.

"Growth Underpinned by a Multitude of Factors"

According to CEO Mike Mack, Syngenta is determined to continue to outperform beyond 2011 by targeting an earnings margin (before interest taxes, depreciation and amortization) of between 22% and 24%, cash flow return on investment of more than 12% and further market share gains. At a recent conference call with analysts, Mack said those goals reflect the company's confidence in the continued growth of its businesses, as well its ability to pursue a "progressive dividend policy" from a higher base.

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With its stable financial condition and strong balance sheet, the company's free cash flow has increased to $1.2 billion. "The free cash flow will remain robust due to strong demand growth from the emerging markets," notes Ankit Jain, analyst at Standard & Poor's, who rates Syngenta a buy. "We think the solid demand for grain will endure with growth underpinned by a multitude of factors." These include a steadily growing global population, increasing urbanization that has reduced the availability of arable land and the rising demand for animal feed due to increased demand for meat and dairy products, says Jain.

Also a big problem is the "increasingly adverse yield conditions," mostly due to factors such as soil erosion, drought, deforestation and plant diseases, laments Jain.

These factors all bode well for Syngenta, which "has built leadership positions in crop-protection and seeds technologies," says the analyst. He forecasts Syngenta will earn $19.70 a share in 2011 on revenues of $12.40 billion, and $20.60 a share on revenues of $12.87 billion in 2012 -- way up from 2009's earnings of $16.42 on sales of $11.64 billion. One share of Syngenta is equal to five ADRs.

Still Largely Unnoticed

Analyst Andrew Stott of Bank of America Merrill Lynch is impressed with Syngenta's array of products and technology. "The overriding fact remains that Syngenta's broad platform is unrivaled," he says. And he sees significant increases in its dividends. That plus acquisition-led growth could enhance further shareholder returns, says Stott, who has a 12-month price target of $73 a share.

As impressive as Syngenta's fast growth and the masterful stock performance are, not many of the large U.S. institutional investors have yet flocked to it. The few that have bought into the stock include Delaware Management, which has acquired a 1.2% stake, and Wellington Management, which owns a modest 0.6%.

Nonetheless, for investors looking for an agricultural play with a record of almost unbridled growth and a stock that's on the rise, Syngenta looks like a well-grounded and fertile investment bet.

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