Monsanto Can Help Your Portfolio Grow

It's understandable why biotech is such a hot sector. An aging U.S. population provides a powerful demographic backdrop for increased demand for drugs and therapies, and large pharmaceutical companies are looking to snap up promising biotech stars to augment their skimpy new drug pipelines.

Although many investors associate biotech with companies that are developing treatments for cancer, diabetes and other life-threatening illnesses, few turn their attention to agriculture and nutrition. Monsanto (MON), for instance, is a supplier of agricultural chemicals, but the company is also a global leader in the development and marketing of seeds and biotechnology traits (related to weed, insect control, weather resistance and improved nutrition) to the world's crop growers.

Green Pastures

And while most biotech companies are still far from profitability, let alone break-even levels of cash flow, Monsanto became solidly profitable in its seeds and genomics business in its last fiscal year ended August 2003. Its free cash flow is expected to be $230 million after dividends this year, more than 100% of estimated net income. Trading at a P/E ratio of 18.3 times the consensus earnings estimate of $1.86 per share for 2005, it seems a little pricey by the chemical sector's standards. But the stock looks like a deal compared to the average biotech company's P/E of 40.

Considering that Monsanto's biotech seeds directly address farm productivity and economics, it's hard to imagine how the company's seeds and genomics business won't continue to be a big success, despite the political and environmental concerns that have arisen over the widespread use of genetically modified seeds. The company has developed seeds and genetic material that can be used to develop seed varieties that provide protection against herbicides (like the company's own best-selling Roundup brand) and insects such as the tobacco budworm, bollworm and corn rootworm. This enables growers to use more productive farming methods like conservation tillage and reduce their reliance on pesticides.