By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics

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Glenview Capital Management position in Monsanto

Glenview Capital Management, a firm that is managed by Larry Robbins, disclosed in recent SEC filings that it accumulated a large holding in shares of Monsanto Company (NYSE:MON), a leading global provider of agricultural products for farmers. As of March 31, 2014, the fund owned approximately 7.7 million shares (including call options) that were valued at $872 million. The position represented 5.7% in Glenview’s total portfolio that was valued at $15.3 billion dollars. Robbins is one of the top performers in the hedge fund industry and generated strong returns in 2013, in part by investing heavily into the healthcare related stocks.

Cheap optionality

In its recent quarterly letter to shareholders, the fund manager discussed the concept of investing in “convertible equities”. The idea is to invest in companies where you can achieve a minimum specific return, or “guarantee” a certain level of certainty as to the profitability while at the same time receiving cheap optionality on higher return “scenarios”. The additional upside optionality can come in many forms, such as a business restructuring, capital structure optimization, growth from new products and ventures, and other sources. According to Robbins, Monsanto presents just such an opportunity. Monsanto Company (NYSE:MON) is an almost monopolistic company with a wide moat in its industry – this will guarantee a reasonable base case return scenario. At the same time, you receive upside optionality, or “call options” on such areas as business growth from new products, potential optimization of capital structure as the company has excess debt capacity, and a promising “precision farming” technology which can become a major contributor to profits over the coming decade and can even become a separate business through an IPO.

Company profile

Monsanto Company (NYSE:MON), along with its subsidiaries, is a leading global provider of agricultural products for farmers. Company’s seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals. Company has two main business segments: Seeds and Genomics and Agricultural Productivity. Company views Seeds and Genomics segment as the driver for future growth for our company. InAgricultural Productivity segment, global glyphosate producers have substantial capacity to supply the market and therefor this global capacity is expected to maintain pressure on margins.

Valuation

As of May 19th, 2014, Monsanto Company (NYSE:MON)’ market capitalization was $60.9 billion and enterprise value equaled $60.2 billion. Company is currently valued at an EV/EBITDA multiple of x14.4 and a P/E ratio of x24.5 (FY 2013). Monsanto pays a regular quarterly dividend which currently provides a 1.5% annual yield. Company also allocates a meaningful amount of free cash flow to returning capital through share buybacks. In June 2013 new share repurchase program was authorized in the amount of $2 billion. During first 6 months of fiscal 2014, Monsanto Company (NYSE:MON) repurchased $764 million worth of shares. Reasonable valuation, defensive business profile, dominant market position, discipline of returning capital to shareholders, and multiple upside “options” provide an excellent investment idea for long term investors.

 

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