Why Monsanto Is a Buy
The Justice Department investigation could provide the perfect entry point for the stock.
Monsanto (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.
However, 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.
Overall, 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.
Shawn 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)."
Hackett doesn't think the DOJ's investigation will have much effect on Monsanto's financial outlook.
"Monsanto 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."
Hackett adds, "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."
Working off 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."
The last 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.
"When everyone 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 years."
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."
With that 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."
"Look 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 favor."
Gary Truitt, 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.
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