Friday, 3 April 2015

Staying patient and waiting for the right level on Monsanto

When I last wrote on Monsanto (link here) back in January I suggested that:

'Whilst earnings downgrades due to market conditions have pulled down earnings capabilities I still have the company trading at x14 EV/ebit at c. US$105.  That is still the level for me to instigate a position.  Was I impressed by the quality of the numbers and associated comments today?  Yes...'

Of course since then the stock has not traded near that level:

But as Seeking Alpha noted on Wednesday when the results were released there was some hope for stock pickers looking to pick up the stock on a 'bad day':

MON says current guidance for FY 2015 EPS is trending at the lower end of its previously forecast $5.75-$6.00 range and below the $5.84 analyst consensus estimate, as a strengthening U.S. dollar erodes sales abroad; MON says the negative effect of currency moves would reduce EPS by $0.35-$0.40

Not the greatest start...but looking through the presentation release actually there is no panic.  As I noted last time the mega-theme still states that be it corn or soy the forward game is yield improvement and not acreage expansion based...and this suits biotechnology-focused solutions like seed businesses:

This is then augmented by the continued building of barriers to entry via innovation.  The seed and related business is oligopolising more and more as a consequence

Reading through the conference call transcript I get a similar vibe...the above 'guidance' really is more to do with FX than anything else: 

We held grower share in every one of our major markets worldwide.

Without incremental $0.15-0.20 FX pressure, basically your guidance would be unchanged? CFO: I would agree

Intacta acreage now stands at 15MM acres for FY15. Our footprint continues to expand in corn.

And then there is the balance sheet where the company continues to net return capital to move to their target net debt:ebitda ratio.  So even though they guided to the low end of the US$2-2.5bn free cash flow target.  That still implies a 4% free cash flow yield (a little more than a third paid out as dividend) - that beloved 5% FCF yield level is where I would love to buy the stock at.  

In the meantime whilst I remain patient on Monsanto I have retained my position in one of its key peers Syngenta which I felt had some catch-up scope (and shares many of the above characteristics)...and as per the US$ listed stocks this has been true for the last few months: 

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