Monsanto planting seeds for future stock growth

Monsanto’s (NYSE: MON) recent earnings report revealed sales of its herbicide Roundup down 21 percent year over year. That’s quite a change from its year-earlier 85 percent jump. Should investors worry? Not really. Sales of the herbicide may not be as strong as they once were, but the future of Monsanto lies not in Roundup but in its genes.

Monsanto was still able to increase its total sales by over 8 percent, thanks to a nearly 20 percent increase in sales of seeds. Those sales come with higher gross margins, which jumped from 59 percent in the year-ago quarter to 62 percent.

Throw in lower sales, general and administrative costs relative to sales, and a lower tax rate, and Monsanto was able to increase its earnings per share by 22 percent. (That figure does exclude some one-time charges.)

Seeds ultimately have a limited volume of sales, since there is only so much land available for crops. But seeds that produce higher yields can add value for farmers. Even if it can’t increase sales volume, Monsanto can charge more for its modified, more productive seeds and can thus boost its sales.

Monsanto’s sales will always be somewhat tied to the price of commodities, but as long as the company continues to develop better crops, it should be a strong grower in any economic climate.

Ask the Fool

Q: I’m confused by Morningstar’s star ratings for stocks. I’ve seen a company that has lost 72 percent of its value this year rated as three stars (out of five), along with a company that has never shown a profit. I don’t get it. – G. James, via e-mail

A: Morningstar is focusing on a company’s future, which should matter most to investors, rather than its past. Its star system reflects how under- or overvalued the stock appears to be, according to its analysts. They arrive at an estimate of its intrinsic value and compare that to the current price. If a stock seems to be worth $100, for example, but is trading at $60, it might earn five stars. If it’s trading at $130, it might get just one star. Good companies can thus sport few stars, if they’re overvalued. Morningstar also takes into account a company’s riskiness, demanding of risky stocks a higher degree of undervaluation for a five-star rating.

If a not-yet-profitable company seems to be worth much more than it’s trading for, it will earn four or five stars, reflecting expected profits. If a company seems roughly fairly priced, it will likely sport three stars.

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My dumbest investment

The first stock I bought years ago was Merck. It went down for two years, starting the day after my purchase. I sold, losing 34 percent of my investment, and then it went back up and split, and on and on. I bought Philip Morris and sold too soon. Bought others, too, only to sell when they had a bad week. Reading the advice of (Motley Fool co-founders) Tom and David Gardner has taught me not to buy if I’m not going to hold at least three years, as a rule. That’s hard to do as I watch some current holdings plummet from my purchase price, but I’m determined to wait it out. There’s nowhere to go but up if we just have patience, right? – L. Lord, Ione, Calif.

The Fool responds: Well, there are no guarantees, but yes - healthy, growing companies should see their share prices eventually start heading upward again as our economy regains its footing. Sell if you find a much better investment, or if a holding no longer seems attractive. But otherwise, hanging in there can pay off.