Plant some seeds in Monsanto (MON)

I’ve mentioned recently that it is difficult to find bargains in the market today, but it may be time to plant some seeds in Monsanto (MON).

The stock market rally has left behind the seed giant as falling grain prices sapped demand for seed and profits from selling herbicides were squeezed by generic competition. Not only has MON lagged the broader market, but it has trailed its peers in the fertilizer and agricultural industries.

But MON has two game-changing products about to hit the market that can drive margins and market share gains for years. The first is SmartStax corn, which has the broadest array of genes available for fighting pests both above and below ground and for tolerating pesticides. The second is Roundup Ready 2 Yield soybeans, which promise higher yields (more beans per pod).

Success of these products will further expand MON’s dominance over the food chain and help win back investors frightened by the shrinking herbicide unit and regulatory concerns. As the saying goes: be greedy when others are fearful.

“Wait, did he just say dominance over the food chain?” Yes, I did.

World population is growing and appetites are growing in developing countries with rising wealth (see related article). With only so much land and water for farming, seed technology that improves crop yield is essential to the planet’s food supply. And unlike fertilizer, the market for genetically tweaked seeds still is largely underpenetrated outside the U.S.

When it comes to the U.S. seed market, MON has at least one of its patented genes in 90% of soybeans and 80% of corn. And competitors can’t seem to catch up, choosing to partner with MON rather than compete. Pouring 10% of sales into research and development, MON has an unmatched product pipeline that Credit Suisse estimates is worth $11 to $17 per share alone. Add this to an intrinsic value between $85 and $88 for the core business and the shares appear to be a steal.

Of course, those who plant seeds in MON shares today must be patient as the upside is limited until we see positive yield performance on the company’s newest products from this fall’s harvest, these results will drive longer-term acreage targets. But, given the decent valuation, strong product pipeline, and solid fundamentals in the agricultural biotech industry, MON represents a compelling long-term investment.

Peter Lazaroff, Investment Analyst