Monsanto Becomes a Biotech on the Move

Nevertheless, even using the lower consensus estimate means Monsanto's P/E has moved up to just 19 from 18.3. That's pricey compared with other chemical companies, but still reasonable compared with the P/E of 40 on the average biotech stock.

Growing Margins

Although Roundup may have performed better than expected in the third quarter, Monsanto's seed and genomics business continues to steal the show and will be the real driver behind management's realistic, if not conservative, goal of a 10% compound annual earnings per share growth rate over the next few years. Sales in seeds and genomics grew 11% in the third quarter, but more importantly, the gross margin was 60% for the third quarter in a row, compared with a high 30% range that the agricultural productivity business has been running at. Monsanto continues to benefit not only from the expanding size of the market for biotech traits, but also from the introduction of new products.

Indeed, Monsanto now sees its total worldwide planted biotech acres reaching more than 170 million in 2004, up 14% from 2003. This includes growth from one of its more mature products: Roundup Ready soybeans, which are expected to reach close to 66 million acres this year in the U.S. alone, compared to just over 63 million acres in 2003. But it also includes growth in plantings that contain more than one biotech trait, also known as "stacking," which includes either weed control and insect control or double insect control traits in one crop. Stacked corn trait acres are expected to reach 9.4 million in the U.S. this year, up from 5.1 million last year. Biotech traits are estimated by some analysts to carry margins in the 80% range, so adding more traits to a crop can have a big impact on profitability.

Collecting Royalties

In addition to increased acreage of its biotech traits planted, Monsanto is getting higher royalty fees for the traits it sells. Monsanto recently announced that it was increasing trait fees on Roundup Ready soybeans from $11-$12 per acre to $15-$17 per acre and on Roundup Ready corn from $6-$8 per acre to $8-$10 per acre. Even if just part of this price increase sticks, it will probably add as much as 10 cents per share in additional earnings in 2005.