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Everybody has to eat. And at the core of the food market is agriculture.
Thus, the underrated agriculture market is one of the best and purest plays on the global rise in caloric intake.
Quite simply, global food intake is on the rise and there’s an increasing demand for high yielding and efficient crops.
Efficient crops is one of those lasting trends that just won’t go away anytime soon. Part of that will be driven by the urbanization of emerging markets. As incomes rise in developing countries, the demand for crops and protein-based foods should rise.
Now, there are a handful of companies that will benefit, all with wide moats built up from years of research and development. And despite the recent oversupply concerns, demand is quickly catching up. The demand for corn has grown by 1.3 billion bushels a year on average over the last three years. Driving that trend is increased demand for feed and a rise in protein consumption in middle-class homes.
The Top Food Stock
One of the biggest and best plays is Monsanto (NYSE: MON). It has one of the cheapest valuations and highest returns on capital in the industry. Monsanto’s moat has expanded thanks to its ability to buy up other seed companies and then flood the market with seeds thanks to licensing deals.
But after failing to convince Syngenta (NYSE: SYT) to agree to an acquisition, Monsanto shares have tumbled 22% this year. Monsanto is now trading at around 14 times next year’s earnings estimates, which is below the likes of DuPont (NYSE: DD) and Syngenta.
Monsanto also offers a 2.4% dividend yield. As I noted earlier this month, Monsanto is one of the top dividend increases for October, having upped its dividend by 10% on Oct. 7.
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Then there’s the fourth-quarter earnings report. The recent disappointing earnings were a hiccup as the company continues to work through near-term headwinds, like generic competition for Roundup weed killer and a spike in anti-GMO sentiment.
The latter should roll off as emerging markets increase demand for genetically modified organisms, with the recongition that the benefits of high-yield and low-cost crops outweigh health concerns. The company still expects to grow earnings by double digits from 2014 to 2019.
A Food Tech Company?
The beauty of Monsanto is its leading research and development pipeline. At its core, Monsanto operates much like a tech company, funneling as much as 10% of its revenues into research and development spending through the years.
Monsanto has been a leader when it comes to getting products to market, and it looks like it will be the leader when it comes to getting a drought-tolerant corn seed to market. This will continue Monsanto’s streak of having best-in-class and first-to-market genetics.
The company has lowered expectations for the interim, but the long-term catalysts are still intact. These includes growth from Latin America and the launch of two new seed platforms, including Xtend and Intacta for soy. Its industry-leading seeds and genomics business could gather even more market share as it becomes a leader in emerging markets. Stronger commodity prices also have the potential to juice earnings.
Monsanto has been left out to pasture after failing to make a successful bid to buy Syngenta. However, nothing has changed in terms of its strong research pipeline and top-notch seed portfolio.
The stock is now trading at the cheapest level in more than five years, while still offering long-term growth potential. And let’s not forget the dividend yield and stock buybacks, which will help support shares in the near term.
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