Growing Agricultural Stocks

The agricultural world has been split into two warring factions: food versus fuel. The end result of this battle is an escalation of agricultural prices called agflation. Increasing global populations and food shortages/hoarding are only compounding the issue. (For more on the food-fuel war, read The Biofuels Debate Heats Up.)

Increasing prices due to supply and demand for agricultural products can be a boon for farmers who can now sell each bushel of grain and drop of milk for a higher price, but farms are also hit with the higher cost of commodities. From feed for their livestock to fuel for their machines, farmers are feeling the pinch. This is why it is even more important to obtain efficient, cost effective equipment and to streamline production. As investors we can enter positions in agricultural related companies as a "picks and shovels" play to gain exposure to this industry's needs.

The rationale is that farmers will need the best seeds, fertilizers, animal feed and other agricultural inputs in hopes of producing the largest yields possible. Therefore, the companies that are selling to the farmers should be in for a decent payday as well.

Monsanto
Missouri based-Monsanto makes a wide range of agricultural products including genetically engineered seeds and herbicide. And although I'm not a farmer by any stretch, even I've heard of Monsanto's Roundup weed killer. The seeds are developed with biotechnology traits which control production, weeds and insects. There has been some debate over the use of these genetically-modified crops, but this article is about the company and the stock. In short, the company sells things that help end users get the most out of their plants. (For more on this industry, check out The Industry Handbook: Biotechnology.)

Monsanto is coming off a decent third quarter where it earned $811 million or earnings per share (EPS) of $1.45. That was up sharply from the $570 million, or $1.02 per share, it turned in during the comparable period last year. It was also north of the $1.34 per share that investors expected.

On the downside, however, Monsanto's sales came in at approximately $3.59 billion, which was south of the $3.71 billion the Street expected. In conjunction with its earnings the company issued guidance. It now expects full-year 2008 EPS of $3.63 on a reported basis and approximately $3.40 on an ongoing basis. In short, that was good news because the analysts polled by FactSet were looking for $3.39 a share prior to the release in late June.

Can Monsanto Keep Growing?
On of September 5, Credit Suisse upgraded its rating to 'outperform' from neutral, and the full fiscal 2008 estimate sits at 3.45 according to Yahoo Finance.

Investors are currently looking for the company to earn $4.48 a share in fiscal 2009 according to Yahoo Finance. That implies a healthy expected rate of growth. The one concern I have with Monsanto is that any stumble could cause the stock to get whacked.

Bottom Line
Food prices will likely continue to rise as our population grows and biofuel development gains popularity.