Wednesday, 2 October 2013

Monsanto - full year numbers review

I have written about the seeds and related sector before with this piece about Syngenta.  In that piece I wrote that:

'Agriculture is a fascinating mega theme.  Syngenta included a very good chart (below) illustrating why all portfolios should have exposure, at some level, to this theme.  In essence we live in a world of material food requirement increases over the next two or three decades and we need to boost agricultural yields/productivity accordingly.  This provides an attractive backdrop for businesses like Syngenta or their peers like Monsanto.  We should not forget that at the core of these businesses is a biotechnology business driven by scientific endeavour.  That also provides a great barrier-to-entry (and also an insight into the strong pricing power already noted)'. 

Need. Barriers-to-entry.  Pricing power.  Potentially that is a great combination. 
So what do today's Monsanto numbers say?
Well full year progress was good (EPS up 21-23% depending on the measure used), although cash flows were flat.   

 Looking forward to the next fiscal year, ebitda is estimated to rise about 17%.  However, once again, free cash flow is down (to around US$1.7bn or c. 15%) even after adjusting for an acquisition (on which front see later). 

Now, just as I noted with Syngenta in our my earlier report, pricing remains very strong.  As shown below '5-10% annual price improvements'.  There are not many companies that can talk about such pricing scope.  This is the benefit of pricing power/barriers-to-entry:

As noted above, Monsanto has very strong leading positions and (as below) very good growth opportunities.  Seeds/related is a good investment theme.

 However, in line with the slightly dull cash flow guidance above, I note the company getting off to a slightly seasonally dull start in their Q1 FY14.  I noted above the c. 17% ebitda growth expectation so it is not a disaster...just a data point which needs to be remembered when the next quarterly number comes out.   

Before we conclude, Monsanto also announced a c. US$900m acquisition of The Climate Corporation as detailed below.

The rationale, as shown above and below, seems good...but it needs to be given they paid a consideration of around US$5.5m per each of the 171 current full-time employees. 
Now admittedly at just c. 2% of Monsanto's market cap The Climate Corporation acquisition is a little more than loose change...but I think they overpaid a little. 
Fundamentally the company is trading on a forward P/E of around x18, so it trades at around a x1 forward peg rating.  This will still be a tick in the box for some growth investors but, given I see a slight fade of cash flow generation (to just above 3%, half of which is paid out) I want to see a lower valuation.  That's US$95 for an initial position which is then augmented each US$5 down (US$90, US$85 etc)
Syngenta, as per my earlier report, generates almost twice the free cash flow and retains many of the thematic positives.  Syngenta, as per below, has also underperformed over the last year.  At the margin I think Syngenta is a bit more interesting than Monsanto currently.

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