This week’s turkey is a classic old-economy stock with a racy dotcom valuation. It is the world’s largest seed producer. It also runs a genomics unit that combines advanced breeding and biotech sciences to develop products, such as herbicides and genetically-modified seeds, to improve agricultural yields and create disease-resistant plants.
Rocketing demand for soft commodities has lined farmers’ pockets, allowing them to splash out on this company’s premium products. Yet with the stock up 13-fold in the past five years, the shares trade on huge sales and p/e multiples of 6.5 and 40 times. It’s time to bank some profits. Here’s why.
Monsanto (NYSE:MON), rated a BUY by Jefferies
Firstly, with the global economy set to deteriorate, both soft commodity and fertiliser prices will weaken as oil demand wanes and the relative profitability of ethanol as an alternative energy source shrinks. Next, much of Monsanto’s explosive top (40%) and bottom (100%) line growth, has been driven by new land being planted for biofuels. The American Department of Agriculture reckons the ethanol industry could consume almost a third of the US corn crop this year, up from 5% in 2000. This growth rate cannot go on forever. When one hears that Afghan drug barons are replacing poppy-seed crops with more profitable wheat, that suggests a bubble.
Finally, because of the knock-on effect of sky-high food prices, which have triggered riots around the world, many countries (such as India) are starting to regulate, or even ban, futures exchanges from trading in softs. The UN is also discussing whether subsidies to farmers for harvesting ethanol should be stopped or cut. Both measures could trigger steep falls in agricultural prices from these inflated levels.
So while Monsanto is performing very strongly, I would rate the business on a 20 times 2008 earnings multiple – giving a fair value of about $67 a share, or nearly 50% less than today. Third-quarter results are due out on 25 June.
Recommendation: SELL at $136.90
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments