Monsanto: Flush Profits, Pricey Shares

The ag-science giant is enjoying growing demand for its corn and soybean seeds. But will the stock stay as high as an elephant's eye?

Call it the Google (GOOG) of the cornfield. A recent flood of good news from Monsanto (MON) has bolstered the agricultural company's stock price as investors anticipate years of double-digit growth from innovative seeds.

Like its hip, high-tech cousin, Monsanto is trading at a record high, and its price-to-earnings ratios in the high 40s is approaching Google-like levels. Those high expectations put extra pressure on Monsanto as it announces quarterly earnings Oct. 10.

The company usually posts a fourth-quarter loss in the highly seasonal agriculture business, which is typically outweighed by big profits in the rest of the year. According to Reuters Estimates, analysts are expecting a loss of about 17 cents per share in Monsanto's fourth quarter, and earnings per share of $2.00 for the whole fiscal year, vs. the $1.30 a share it earned in fiscal 2006. Analysts expect Monsanto to post EPS of $2.50 in fiscal 2008.

With Monsanto's stock up 71% so far this year, the market will be looking for signs that Monsanto can continue to exceed investors' ever-higher expectations in the coming years.

Analysts say keys will be earnings expectations for 2008, the pipeline for new seed products and the prospects for regulatory approvals around the world.

The levels of optimism around Monsanto right now are sky-high. "Monsanto could, over the next 20 years or so, quadruple its earnings power," wrote Laurence Alexander of Jefferies & Company.

There's a long list of growth drivers for Monsanto. The company has spent years funneling billions of dollars into research and development, coming up with new seeds to help farmers grow more corn, soybeans and other crops. Now, it's harvesting the benefits of this investment.

In the short term, this has paid off as demand for ethanol has boosted demand for its corn seeds. Monsanto is boosting market share in the U.S., analysts say, as strong crop prices make money for farmers, making them more willing to invest in Monsanto's fancy seeds.

But many are also excited about Monsanto's possibilities outside the U.S. "The scope and scale of the international opportunity is becoming increasingly clear," says Ben Johnson, an analyst at Morningstar (MORN).

Driving this growth is the very real benefits that genetically modified seeds offer to farmers.

The debate over the long-term impact of genetically modified food — which some call "Frankenfoods" — is real. Monsanto must spend lots of time and money convincing regulators around the world to say its products are safe.

But while environmentalists continue to raise questions, farmers are clamoring for Monsanto's products. "The benefit to the farmer is just so unmistakably clear," Johnson says.

The new seeds help protect crops against disease and bugs. That provides insurance to farmers, and can help save on pesticides and herbicides. But even newer seeds are expected to go further, allowing farmers to grow more food from each seed, and with less fertilizer and water. All these developments can really boost a farmer's bottom line.

It takes years, often more than a decade, to turn a new seed discovery into a commercially available product. Monsanto, and many analysts, predict a steady stream of innovative, new seeds coming out of the company well into the next decade. Exciting areas aren't just corn and soy, but also cotton, fruits and vegetables.

Monsanto is expected to spend more than $900 million on research and development next year. Also, it hasn't been shy about partnering with other top agricultural researchers to develop and market their products.

Though alternative energy products like ethanol are driving demand in the near term, broader trends may provide a longer-lasting driver for agricultural products. There's a finite amount of land in the world, but a growing, and wealthier, population will demand more, and higher-quality, food. Products like Monsanto's seeds are expected to help meet that gap.

Add up all these trends and you get a stock price that's up 92% in the last year. At midday on Sept. 9, the stock was trading above $89 per share, a record.

The risks for Monsanto are increased competition, especially on product development, a cooling off of the agriculture sector and increased scrutiny of genetically modified foods. But the biggest risk for the company may simply be the high levels of optimism, as any new piece of bad news could bring Monsanto's stock price closer to Earth.

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