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Is there a more universally hated company than Monsanto (NYSE: MON)?
Despite having little idea of what the company actually does, many average people demonize the agricultural innovator and therefore miss the good it does around the world, and the generally strong business it has.
That being said, Monsanto had some lousy results in its just-released report for its fiscal first quarter. Like many global companies, currency issues hit Monsanto’s bottom line. Monsanto’s expenses got a little bloated in recent years and it is making progress by cutting costs. Mostly, though, the global economy is buffeting the company, and more so than I personally expected.
In the first quarter, Monsanto’s total net sales fell by $650 million, or a whopping 22%, from the year-earlier quarter. The seeds and genomics segment accounted for $221 million of that, or 13.5%, with the rest of sales coming from its agricultural productivity segment.
Monsanto said the declines were due to the aforementioned strong dollar, weaker foreign currencies, the devaluation of Argentinian currency and lower Latin American corn volumes.
The result was a 36% decline in gross profit to $901 million. Operating expenses increased by 30% from the year-earlier quarter, and the end result was a $253 million net loss for the quarter.
Free Cash Flow and a Full Pipeline
Despite all these headwinds, and one of the reasons to like Monsanto, is that it still generated a $1 billion in free cash flow. If a company can take hits that are this sizable and still punch out that much cash, it’s got a solid moat to defend its position. Monsanto even projects free cash flow of $1.6 to $1.8 billion for FY16, which is great news.
The other good news is that Monsanto is constantly engaged in R&D. That means it’s got about 20 new products in the pipeline. So instead of just being an agricultural play, it’s kind of like owning a biotech company in many respects.
So what investors see with Monsanto is operating cash of $2.6 to $3 billion, of which a third or so gets spent in investing activities and R&D.
The balance sheet remains in good shape. Monsanto has $2.3 billion of cash in its coffers. It has $8 billion in long-term debt, but that’s at an interest rate of about 5% annually. Losing about 10% of gross profit to interest is not unreasonable, and in times when the currency situation isn’t so bad, that ratio drops.
Should You Own Monsanto?
The question now arises as to whether you should buy, sell, or hold Monsanto. The stock trades at $95 and is about 25% off its high. It’s also about 15% off its low of $81 over the past year.
If you don’t own Monsanto, I would not buy here. I think the global economy is struggling, and having already seen it hit $81 in late September, I think you want to wait for those levels or below to jump in.
I think if you already own Monsanto at or around this price, you may as well hold onto it. It is a best-in-class company that will see through these tough times. You may want to consider adding shares in the low-80’s or below.
Now, if you purchased Monsanto near its highs, I think selling here is appropriate. If you really want to own it, you can get back in at lower prices. Take the capital losses to use to offset gains, and find other stocks that are more likely to perform in 2016.
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