Monsanto Co. (NYSE:MON) reports preliminary financial results for the year ended 2012-08-31.
Monsanto Co. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.
Monsanto Co.’s analysis versus peers uses the following peer-set: BASF SE ADS (BASFY), E.I. DuPont de Nemours & Co. (DD), Dow Chemical Co. (DOW), Syngenta AG ADS (SYT), Archer Daniels Midland Co. (ADM), CF Industries Holdings Inc. (CF), Bunge Ltd. (BG) and FMC Corp. (FMC). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Annual (USD million) | 2012-08-31 | 2011-08-31 | 2010-08-31 | 2009-08-31 | 2008-08-31 |
|---|---|---|---|---|---|
| Revenues | 13,516.0 | 11,832.0 | 10,502.0 | 11,689.0 | 11,365.0 |
| Revenue Growth % | 14.2 | 12.7 | (10.2) | 2.9 | 32.7 |
| Net Income | 2,039.0 | 1,605.0 | 1,105.0 | 2,098.0 | 2,007.0 |
| Net Income Growth % | 27.0 | 45.2 | (47.3) | 4.5 | 117.7 |
| Net Margin % | 15.1 | 13.6 | 10.5 | 17.9 | 17.7 |
| ROE % | 17.3 | 14.8 | 11.0 | 21.6 | 23.8 |
| ROA % | 10.2 | 8.5 | 6.2 | 11.7 | 13.0 |
Valuation Drivers
Monsanto Co.’s current Price/Book of 3.9 is about median in its peer group. The market expects more growth from MON-US than the median of its chosen peers (PE of 23.5 compared to peer median of 15.2) and to improve its current ROE of 17.3% which is around peer median.
The company’s relatively high profit margins (currently 15.1% vs. peer median of 8.8%) are burdened by asset inefficiency with asset turns of 0.7x compared to the peer median of 0.9x. Overall, this suggests a margin driven operating model relative to its peers. MON-US’s net margin continues to trend upward and is above (but within one standard deviation of) its five-year average net margin of 14.1%.
Economic Moat
Changes in the company’s revenues are in-line with its peers (annual revenue changed by 14.2%) but its earnings performance has been better — its annual earnings changed by 27.0% compared to the peer median of 17.4%, implying that it has better cost control relative to its peers. MON-US currently converts every 1% of change in revenue into 1.9% of change in annual reported earnings.
MON-US’s return on assets is above its peer median both in the current period (10.2% vs. peer median 8.4%) and also over the past five years (9.9% vs. peer median 7.3%). This performance suggests that the company’s relatively high operating returns are sustainable.
The company’s comparatively healthy gross margin of 56.4% versus peer median of 31.8% suggests that it has a differentiated strategy with pricing advantages. Further, MON-US’s bottom-line operating performance is better than peer median (pre-tax margins of 22.1% compared to peer median 11.4%) suggesting relatively tight control on operating costs.
Growth & Investment Strategy
While MON-US’s revenues growth has been around the peer median in recent years (5.0% vs. 4.3% respectively for the past three years), the market gives its shares a higher than peer median PE ratio of 23.5. The market seems to see faster growth ahead.
MON-US’s annualized rate of change in capital of 6.0% over the past three years is less than its peer median of 9.2%. This investment has generated a peer median return on capital of 12.1% averaged over the same three years. The median return on capital investment on a relatively lower investment suggests that the company is under investing.
Earnings Quality
MON-US has reported relatively strong net income margin for the last twelve months (15.1% vs. peer median of 8.8%). This margin performance combined with relatively high accruals (7.5% vs. peer median of 2.8%) suggests possible conservative accounting and an understatement of its reported net income.
MON-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.
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