Ticker: MON

Sector:
Basic Materials
Industry: Agricultural Chemicals

Recommendation:

HOLD

Pricing
Closing Price $55.79 (9/05/10)
52-wk High $87.06
52-wk Low
$44.61

Market Data
Market Cap
$30.15B
Trading Vol. 5.92M avg
Total Assets $18.3B
Total Liabilities
Valuation
EPS (ttm)
P/E (ttm)
P/S (ttm)
P/B
Div Yield

$1.83
$30.49
$2.94
$2.90
2.01%

Profitability & Effectiveness

ROA (5 yr avg)
8.71%
ROE (5 yr avg)
14.48%
Oper. Margin
18.87%
Profit Margin
13.4%

Recommendation
Hold
Monsanto has been beaten up over the last few
months and based on current forecasts and its current
financial situation, we feel it is slightly undervalued
and our current investment will recover some of the
recent losses.
Recently, Monsanto commercially launched two
major next-generation products that have significant
revenue growth potential. Our recommendation
reflects Monsanto's leading market positions in corn,
soybeans, cotton and vegetable seeds and traits, and
its R&D-driven expertise in plant biotechnology that
enables high profit margin and strong cash flows. The
company's portfolio benefits from patent protection
for most of its key products, which creates high
barriers of entry for new market entrants. In addition,
Monsanto licenses its technologies and traits to its
competitors.
Further, their commitment to a significant share
repurchase program leads us to believe they agree
with us on the stocks undervalued nature.

Analysts: Taylor Fox & Ali Rife

Company Summary
Monsanto is a multinational agriculture biotechnology corporation. It was founded in
1901 when it produced saccharine, a sugar substitute. It currently has 18,800 employees
in over 60 countries. It is currently the largest conventional seed company in the world.
Monsanto is structured in two segments:

Seeds and Traits segment consists of the company's global seeds and traits
business, and genetic technology platforms - including biotechnology, breeding
and genomics. This segment produces corn, soybeans, canola, and cotton seeds, as
well as vegetable and fruit seeds, including tomato, pepper, eggplant, melon,
cucumber, pumpkin, squash, beans, broccoli, onions, and lettuce. This segment
also develops biotechnology traits that assist farmers in controlling insects and
weeds, as well as provide genetic material and biotechnology traits to other seed
companies for their seed brands.
Agricultural Productivity segment consists primarily of crop protection products,
residential lawn-and-garden herbicide products, and the company's dairy business.

Monsanto has been able to create the worlds largest library of genetics for corn, oilseeds,
cotton, and vegetables.
Monsanto Leadership
Monsanto is lead by CEO Hugh Grant who has been with the company since 1981. Grant
was named one of the world's 30 most respected CEO's on Barron's annual list in March
of 2009 and in 2010 was named CEO of the year by Chief Executive magazine.
Executive pay is based on growth in cash flow, EPS, and sales. Monsanto also requires
executives to own a multiple of their base salary in stock.

Industry Profile
The chemicals industry is comprised of
diversified chemicals, fertilizers and
specialty chemicals. The industry is
manufacturers hold significant market
supply chain integration and economies

companies that produce commodity chemicals,

agricultural chemicals, industrial gases, and
concentrated in areas where a few large
share. The larger manufactures benefit from
of scale, whereas smaller manufacturers utilize
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product specialization and efficient operations in order to compete. The industry is

capital-intensive. In 2009, the industry spent about $24 billion in capital expenditures and
$27 billion on research and development. The industry is cyclical and affected by costs
for basic commodities, especially oil and gas. It is the second largest industry in term of
energy usage, so the prices of those commodities greatly affect this industry. The S&P
Fertilizers & Agricultural Chemicals Index increased 25.0% in 2009, versus a 24.3% rise
in the S&P 1500 Composite Index. This followed a decrease of 40.1% in the S&P
Fertilizers & Agricultural Chemicals Index during 2008, versus a 38.2% drop in the S&P
1500.
Industry Outlook
Looking ahead, the chemicals industry is expected to soften due to the economic
correction. However, low crude oil prices may lower production costs and strong demand
in emerging economies may offset certain negatives. The industry may see increased
consolidation due to intense competition, the need for cost efficiencies, and economies of
scale. The U.S. farm economy and crop markets are generally mature, with cultivation of
corn the largest use for agricultural chemicals. The USDA reported in June 2009 that
farmers had planted about 87 million acres with corn for the year, up 1% from the prior
year. Much of the growth in global nutrient use has come from developing countries in
Asia and Latin America, as these regions' rising populations and income levels boost the
need for grain production. We expect fertilizer and seed companies to continue shifting
focus to these markets in coming years.

SWOT Analysis
STRENGTHS
Advanced Technology: Monsanto strives to help Farmers get the most out of each acre of
land. In order to accomplish this Monsanto has developed a pipeline on three core pillars:
advanced breeding, biotechnology, and improved agronomic practices. When all three
components are fully integrated, crop yields have and will continue to increase.
Everything they do is aimed at helping to make agriculture more productive and more
profitable for farmers. Monsanto invested more than $980 million last fiscal year
researching new tools for farmers. The company concentrates the vast majority of its
research-and-development (R&D) efforts on new biotech traits, elite germplasm,
breeding, new variety and hybrid development, and genomics research. Other R&D
projects support the companys current products, including improved formulations of
Roundup herbicide. Their importance on R&D sets the tone for Monsanto as whole. They
will remain the leader in farming technology because of the importance of R&D. They

set an annual 10% of sales budget for R&D. Monsantos main competitive strategy is to
have the most advanced technology.
Diversification: Monsanto has their two main business segments but each segment is very
diverse. In the Seed and Genomics segment sales are: 66% from corn seed and traits,
19.5% from soybean seed and traits, 2% from cotton seed and traits, 9% from vegetables
seeds, and 3.5% from other crops seeds and traits. Then the Agricultural Productivity
segment sales are: 74% from Roundup and 26% from all other agricultural products.
Their biggest diversification is geographically. They have positioned themselves to meet
all the needs of North America and continue to have even a greater presence in foreign
countries. Monsanto has been a pillar of excellence abroad for much longer than their
competitors. They are in a much better position to handle the needs of a growing global
economy.

WEAKNESSES
Litigation and Public Outlook: In February 2009, a group of residents from Sauget,
Illinois filed a suit against Monsanto and its subsidiaries alleging that for years the
company dumped toxic and carcinogenic chemicals that poisoned their town. In addition,
Monsanto has been identified by the U.S. Environmental Protection Agency as being a
"potentially responsible party" for 56 contaminated sites in the United States. Monsanto
has been sued, and has settled, multiple times for damaging the health of its employees or
residents near these contaminated sites. Overall, there is a vast list of lawsuits and
accusations about MON. They are criticized by many environmental groups and in many
rural areas have a very poor brand outlook. These litigations and criticisms definitely hurt
MONs performance and are an issue they have dealt with for many years.
Financial Liquidity: Currently, the Quick Ratio is 1.36, which shows a lack of ability to
cover short-term cash needs. The company's liquidity has decreased from the same period
last year, indicating deteriorating cash flow. Overall, the key liquidity measurements
indicate that the company is in a position in which financial difficulties could develop in
the future. Inventory growth rates surpassed sales growth rates. This indicates that MON
could experience vast inventory build-up that could lead to liquidity problems. The
payout ratio for MON is 37.14%, while its historical payout ratio has been 36.40%. This
indicates that dividends will not rise and if this rising trend continues dividends could be
cut.

OPPORTUNITIES
Financial Strength: Monsanto has a debt-to-equity ratio that is very low at 0.19 and is
currently below that of the industry average, implying that there has been very successful
management of debt levels. The gross profit margin for MON is high; currently it is at

52.00%. MON's long-term growth rate of 11% based on the average of 5-year historical
EPS growth rates. MON has a high ROA of 8.71%, which ensures that there are no
structural flaws in the company. Management has been successful in allocating and using
their assets and has created a strong long-term balance sheet. Somehow, they need to
control their short-term debt and liquidity problems. If that is done, MON could be very
strong financially and could pay a larger dividend.
Emerging Markets: Monsanto has a supplier diversity pledge: As a global company that
deals with food, feed and fiber producers in many different countries, cultures and
environments, Monsanto understands the importance of diversity, and have created a
Supplier Diversity Program to help meet the need in this area. This shows that Monsanto
is aware of their opportunities in emerging markets and will be a leader in those markets.
India, China and Brazil are showing the most agricultural growth globally. At the
beginning of November, the company opened the Monsanto Biotechnology Research
Center in Zhongguancun, China, to strengthen its ties with Chinese research institutions
in plant biotechnology and genomics. The research center will participate in early-stage
bioinformatics and genomics research and serve as a base for collaborating with Chinese
scientists. Monsanto also has research centers in the U.S., Brazil and India. As I stated
before MON is already in place to be a dominant force in these emerging markets and
they will see a significant benefit from that dominance.
Acquisitions to enhance market share: Monsanto acquired a number of companies in
2008 and 2009 to enhance its market share. In June 2008, Monsanto acquired De Ruiter
Seeds Group, a Dutch-holding company that owns and operates De Ruiter Seeds.
Monsanto also acquired Marmot, which operates Semillas Cristiani Burkard (SCB), a
privately held seed company headquartered in Guatemala City, Guatemala. SCB is the
leading Central American corn Seed Company focused on hybrid corn production. In
December 2008, Monsanto acquired Aly Participacoes, which operates the sugarcane
breeding and technology companies, CanaVialis and Alellyx. Their location and expertise
in Brazil are important, as Brazil is the world's largest producer of sugarcane, the largest
exporter of finished sugar, and the world's second-largest producer of ethanol. With these
acquisitions, Monsanto would be able to build a stronger platform to promote the
company's brand image and further strengthen its market position and customer base.
They continue to diversify and expand operations which allow them to eliminate even
more competition.
New Product Pipeline: Monsanto has a record high of 11 projects currently in their R&D
pipeline. The 4 major projects are as follows. Corn Yield Drought Tolerant, the drought
tolerant corn, is in the fourth phase of commercialization. This phase includes
development and testing of best trait and germplasm combinations for commercial
launch. The company's Genuity SmartStax Corn is also in the fourth phase of
commercialization. Genuity SmartStax corn is the first, most durable, and highestyielding package for total weed and bug control in corn. Genuity SmartStax moved into
Phase 4, the final step prior to the product's planned 2010 commercial launch, pending
regulatory approvals. Monsanto's Soy Yield Intrinsic Development, the higher yielding
soybean, moved into Phase 4. The Roundup Hybridization System for corn would replace

detasseling in hybrid seed corn production, thus reducing cost of goods. RHS, which
moved to Phase 3, utilizes a transgenic corn trait created by Monsanto. The hybrid seed
generated from this technology results in a fully fertile and glyphosate-tolerant plant.
Successful commercialization of these products over the next few years would further
enhance Monsanto's product portfolio and keep them atop the agricultural world in
product advancement and technology.
THREATS
Extensive regulations: Monsanto has come under attack as of late for what some view as
anticompetitive behavior. The company's glyphosate-resistant technology has
transformed agriculture, and many competing seed companies cross-license the
technology because of its widespread acceptance. With Monsantos patented genes being
inserted into roughly 95 percent of all soybeans and 80 percent of all corn grown in the
U.S., the company is using its wide reach to control the ability of new biotech firms to get
wide distribution for their products, according to a review of several Monsanto licensing
agreements and dozens of interviews with seed industry participants, agriculture and legal
experts. Stringent regulatory and legislative requirements affect the development,
manufacture, and distribution of Monsanto's products. Obtaining permits for mining or
production or testing, planting, and import approvals for seeds or biotechnology traits can
be time-consuming and costly, with no guarantee of success. The failure to receive
necessary permits or approvals could have near-and long-term effects on the company's
ability to sell some current and future products. It appears Antitrust investigations will be
ongoing which will potentially tie up funds for legal assistance. If the investigations
continue to escalate then MON will see a drastic hit on legal costs.

Competition
Monsanto's leading market positions in corn, soybean, cotton and vegetables seeds and
traits. The company's portfolio benefits from patent protection for most of its key
products, which creates high barriers of entry for new market entrants. In addition,
Monsanto licenses its technologies and traits to its competitors. These agreements
generate a recurring royalty stream that further supports the company's profitability.

1 Year chart compared to S&P 500 along with Syngenta, a primary competitor.

Analyst Opinion
Two most recent changes have been downgrades.

Valuation
Based on the current economic climate and Monsantos flattening revenue, we forecasted
slow but developing growth over the next 10 years. Further, using 10% as our benchmark
discount rate, you can see the sensitivity analysis below the valuation spreadsheet. It is
important to note, that with the given parameters, the intrinsic value is greater than the
current stock price. We feel they have the potential to earn greater than the 1.5%
forecasted after the 10 years due to their market leading position and competitive
advantages but felt this was a safe number to base initial forecasts on.

Sensitivity Analysis: We chose to alter the second stage growth rates since modifying
the first stage does not have quite as large of an impact.
Please see excel document for DCF valuation.

Recent News

$1 Billion share buyback over the next three years. However, they intend to finish
by year-end 2010.
o However, in the most recent quarter, they issued about the same amount of
debt as shares they repurchased.
Fitch ratings has rated Monsantos debt as A+
Monsanto sees FY 2010 EPS guides to be on the low end of forecast.
In the quarter ending 5/31/10, numbers are down across the board. Revenue is off
25% from the previous quarter and off almost 7% from last years. Operating
Expenses are up due to high COGS resulting in weaker Net income as well.
Significant cash outflows for M&A to pursue the company's growth-throughacquisition strategy, substantial dividends, and a sizeable share repurchase
program. Over the past few years, Monsanto completed multiple acquisitions for
an aggregated amount of more than $2.8 billion to broaden its product portfolio
into cotton, vegetables, and other seeds and to expand its geographical footprint in
Latin America and other regions outside the United States.
Continue to spend a significant amount, around $1 billion each year on capital
expenditures.

Financials
Income Statement

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Balance Sheet

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Statement of Cash Flows

Sources
http://www.reuters.com/finance/stocks/financialHighlights?symbol=MON
http://moneycentral.msn.com/investor/research/newsnap.asp?Symbol=MON
http://online.wsj.com/article/SB10001424052748703701004575113911550788020.html
Bloomberg Terminal
Morningstar
http://www.monsanto.com
finance.yahoo.com
finance.google.com

http://www.businesswire.com/news/home/20100629006860/en

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