Why Monsanto Is a Buy
Justin Rohrlich March 15,
2010 2:00 PM|
The Justice Department investigation could provide the perfect entry point for the stock.
(MON), founded in 1901, has come quite a ways since
its first sale: a 50-gallon drum of saccharine to
Coca-Cola (KO). The company develops bioengineered
seeds using patented genes which produce crops resistant
to pests, drought, and herbicides.
these benefits come at considerable cost -- corn seed
prices have risen 135% since 2001 and soybean seed prices
have gone up 108%, compared with a commensurate rise
in the Consumer Price Index of 20%.
The New York
Times says “farmers have been willing to pay a premium
price” for Monsanto seeds because they “[simplify] weed
control and [save] labor, fuel and machinery costs.”
They also don’t require as much chemical spraying as
non-modified seeds, an additional cost savings.
the seed industry has undergone massive consolidation
-- DuPont (DD), Syngenta
(SYT), and Dow Agrosciences, a division of Dow
Chemical (DOW), have all absorbed smaller outfits
-- but, as the undisputed market leader, Monsanto naturally
invites the most focus. The company is in the midst
of an antitrust investigation by the Justice Department,
which is attempting to determine whether or not the
company is using its patents on genes to exclude competitors
from the marketplace.
Hackett, president of Hackett Financial Advisors, a
money-management firm with a focus on the agricultural
sector, says that, while Monsanto may have a “heavy
hand,” when a company dominates a market, “people tend
to go after you, whether it’s Philip Morris
(MO) or Microsoft (MSFT).”
think the DOJ’s investigation will have much effect
on Monsanto’s financial outlook.
has one of the best patented gene pools in the industry
and there’s not a lot anyone can do to change that,”
he says. “Farm yields have doubled since the 1970s,
thanks to the genetics Monsanto has developed, it’s
allowed farmers to plant more seeds per acre, realize
greater output, and without Monsanto seeds, farm operations
would be nowhere near as profitable as they are today.”
“I’m not saying Monsanto is a bunch of angels, but they’ve
been tremendously beneficial to farmers -- as well as
the world’s food supply -- and they should be getting
paid handsomely for what they do.”
the Microsoft analogy, Hackett says, “Without Microsoft,
the computer industry would be in a lot of trouble.
Without Monsanto continuing to have the resources to
develop things like drought-resistant seeds, the agriculture
industry would have trouble existing. You simply cannot
have a flourishing global ag business without Monsanto.”
time Monsanto was facing this level of turbulence was
in the early 2000s, when the “Frankenfood” movement
was gaining traction. Hackett says this was, in fact,
the best time to have bought the stock.
was saying ‘Don’t touch it!’ Monsanto dipped to $7,”
he notes. “Then, five years later, it was trading at
$150. I’m not saying history always repeats, but we
could retest the highs again over the next couple of
He also believes
the antitrust investigation is more politically-driven
than not -- as does former American Farm Bureau President
Dean Kleckner, who said the series of “agricultural
workshops” hosted by the USDA and the DOJ’s Antitrust
Division to “explore competition issues affecting the
agricultural sector in the 21st century” that began
on Friday in Ankeny, Iowa, are “mostly for show” and
are all “about politics and posturing.”
in mind, Hackett says Monsanto is “a fantastic buy.”
He points to a price chart that “hasn’t done anything,
and has been stuck in a sideways trending pattern.”
at the outperformance of Syngenta stock versus Monsanto
over the last year. This spells opportunity, in my view,
to buy Monsanto,” Hackett explains. “As the antitrust
concerns begin to subside later this year, the price
gap between Syngenta and Monsanto should narrow in Monsanto's
president of Hoosier Ag Today, thinks that, whichever
side you happen to be on politically, the public workshops
will benefit all involved.
It’s a topic that warrants continued insightful discussion.
There’s no easy answer to any of this. Sure, Monsanto
has gotten mighty big, but then again, so has
Tyson (TSN). The poultry industry has a tremendous
amount of vertical integration and is controlled by
a small number of players. Is that bad? Is that good?
I don’t know. What I do know is, consumers like paying
99 cents for a bag of chicken legs at the grocery store,
which comes from tremendous economies of scale. We need
to be careful before we rush to judgment, and where
the line gets drawn, we’ll just have to wait and see.