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Don't Harvest Monsanto Yet

NEW YORK ( TheStreet) -- Just like fertilizer to a plant, it's appropriate that shares of agriculture giant Monsanto (MON - Get Report) have grown impressively over the past two years.

This has come even amid protests over Monsanto's genetically modified seeds and complaints about the company's ethics. Some believe that Monsanto has established unfair pricing tactics towards farmers. These issues and others have soured Monsanto's relationship with consumers. There's never a dull moment. But investors have had little to complain about.

With Tuesday's close of $112.90, shares of Monsanto are up more than 60% since May 2012. But with the stock down 3% year-to-date, I don't believe it's time to harvest these gains. And given the company's strong second-quarter earnings results, Monsanto's management have planted optimism that these shares are far from ripen. So, for stock should bear more fruit, investors need a little patience.

Last week, the company reported revenue of $4.65 billion, which jumped 7% year over year. For a company that's known to "under-promise," this was a strong sales quarter, helped by a 21% jump in soybean seed and traits. Corn seed and traits edged up more modestly at 4.1%.

Unlike previous quarters, Monsanto's core seed operations are doing the heavy lifting. Investors should be encouraged by this. There were concerns last year that the company's agricultural productivity business, which included herbicides such as Roundup, had moved from being a side dish to the main course.

Ahead of the report, given that corn is Monsanto's main revenue-driver, some analysts forecast weak corn acreage. They thought they were doing the company a favor. But through management's efforts, the seed and genomics business have regained their bread-and-butter status.

With revenue of $1.18 billion, more than 5% year-over-year, the productivity business still produced. This means Monsanto has become more balanced and well diversified.

And from an operational perspective, that fact that gross margin jumped to 59.1% from 56.1% shows that management's efficiency improvements have begun to pay off. This lead to a 13% jump in net income, helped (in part) by a product costs decline of 0.7%. But management is not satisfied.

Monsanto wants to expand its footprint in what management called "precision farming," a practice that uses GPS and other technologies to help farmers boost crop yields. This was the reason Monsanto spent $930 million to pick off Climate Corp, a farm analytics company that specializes in customized weather information.

Following the impressive report, JPMorgan (JPM) upgraded the stock to overweight and upped its price target to $125 a share. From Monday's close, this suggests roughly 12% upside to current value. Given Monsanto's market position in corn and soybeans or rivals like Syngenta (SYT), JPMorgan's target seems conservative.

And when factoring that management backed its full-year outlook, saying it expects to post a smaller loss in the fourth quarter compared to previous years, this suggests more efficiency improvements, cost-cutting and possibly better pricing leverage.

All told, this is company that's operating on all cylinders. Despite Monsanto's recent successes, more market share gains are expected. With the stock trading 4 points lower on fiscal 2015 estimates, these shares remain a strong buy. On the basis of continued margin expansion and revenue growth in seeds, I project fair value to approach $130 in the next 12 to 18 months.

At the time of publication, the author did not hold any stock in the companies mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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