There’s never a dull moment in the world of Monsanto ($MON). When the company is not being publicly crucified for its genetically modified seeds, controversy spreads about the company’s ethics and what many believe to be Monsanto’s unfair pricing tactics.
These (among other things) have soured Monsanto’s relationship not only with the farmers that rely on its seeds, but also with consumers who buy the produce.
However, even with all of the public bickering, investors who have planted their faith in Monsanto have not gone hungry. That the stock has posted gains of more than 17% on the year is a testament not only to strong management team, but also the extent to which Monsanto has differentiate its products from rivals DuPont ($DD) and Syngenta ($SYT). I don’t believe investors will get a better chance to get in on this dominant agriculture company than on this recent pullback.
As of this writing, the stock is down more than 5% from a high of around $109 per share in May. The stock has taken a slight hit because not only did Monsanto report a worse-than-expected loss for its fiscal fourth quarter on Wednesday, but management also provided guidance that was below Street expectations. Investors have — understandably — become anxious. But I don’t believe it’s time to panic.
For instance, even with the 1.5% decline in overall revenue, sales of cotton seeds more than doubled to $65 million. What’s more, that the Agriculture business continue to pose year-over-year double-digit gains (up 13.6%), management has plenty of time to shore up weakness in areas like soybeans. While it’s true the company did report a higher operating loss, it’s worth noting here that the fourth quarter has always known to be a seasonally weak period for the company.
To that end, those who are now proclaiming that Monsanto is “getting what it deserves” have to do a better job of explaining that actually means. Clearly, there are many who will disagree with me on this, but the way I see it Monsanto has always had a strong business.
While the company’s unfavorable public relations situation has been partially linked to this quarter’s poor sales performance, it’s always been “Mother Nature” that has hurt the company in the past. In fact, the severe drought in 2012 that adversely affected the soil in several parts of the United States caused more damage to the company’s seed business than any boycott.
This is why management was forced to use South American greenhouses to produce corn seeds, which caused a 7% increase in the company’s costs of goods sold in the June quarter. Essentially, the weather, which has adversely impacted crop planting in several areas, has been the only thing that has kept Monsanto from executing on its full potential.
On Wednesday, management decided to “weather the storm” by virtue of its $930 million deal to buy Climate Corp., which specializes in agricultural analytics and risk management. I won’t go into whether Monsanto overspent on this acquisition, but to the extent that Climate Corp. can help the company with sufficient weather monitoring tools and the necessary intelligence to predict changing climates, it will be a worthwhile investment.
Along those lines, with more efficient crop planting processes, Climate Corp. can certainly further Monsanto’s ongoing effort to repair relationships with farmers and customers around the globe. This will circle back to the overall business, which will then become less reliant on the herbicide segment for majority of its sales. This was, in fact, a well-timed acquisition.
But I’m not going to pretend this was an exceptional quarter. Even so, I don’t believe Monsanto is the type of company that should be judged on a quarter-by-quarter basis. Given the company’s strong pipeline and growth potential in areas including Europe, Latin America and Asia, the company remains poised to post solid revenue growth for many years to come.
The stock is not exceptionally cheap, however. Even with the recent pullback, I have to say shares of Monsanto are priced at a slight premium. But I’ve always been told there’s never a wrong time to plant a tree.