There has been a lot of negative sentiment in the market lately: Inflation is on the rise, production and manufacturing has halted, and consumer spending – which represents 70% of U.S. GDP - is on the fall.

However, through all of the market angst, investor fear, and economic slowdown – Monsanto’s (MON) stock managed to appreciate 137% in 2007, compared to a measly 6.5% return on the Dow Jones. Monsanto’s huge rally is absolutely fascinating and we here at the StrategyLab Open would like to jump in and give it the basic rundown.

Who is Monsanto? What do they do?
Monsanto is a major player in the agricultural industry. It is the world’s leading producer of the herbicide known as “Roundup”. Monsanto is also the leading manufacturer of genetically engineered seeds, and holds a 70%–100% market share on various crops.

Monsanto produces leading seed brands in crops like corn, cotton, and oilseeds (soybeans and canola). It also produces the leading “in-the-seed” trait technologies for farmers that aim to protect their yield, support their on-farm efficiency and reduce their overall on-farm costs.

In short, Monsanto is the “Guy behind the Guy” when it comes to farming. It provides efficient seeds of all sorts to farmers all over the world. They are in the business of maximizing the potential of the seed itself. This makes Monsanto the farmers’ best friend – they help farmers make more money, through efficiency and quality.

Monsanto’s business is structured into two segments:

• Seeds and Genomics – this segment consists of the company’s global seeds/traits business, and genetic technology platforms - including biotechnology, breeding and genomics.

• Agricultural Productivity – this segment consists primarily of crop protection products, residential lawn-and-garden herbicide products, and the company’s dairy business. The “Round Up” business fits in here.

Killer Earnings, Sales, and Revenue
Monsanto recently reported that its first-quarter earnings nearly tripled due to surprisingly strong herbicide and seed sales in Latin America. Sales were so good that Monsanto wound up increasing its earnings forecast for the whole year.

Monsanto earned $256 million, or 46 cents per share, during its first fiscal quarter, which ended on November 30th 2007. This report comes in at almost triple its profit of $90 million during the same quarter last year!

Monsanto’s revenue during the first quarter jumped 36 percent to $2.1 billion – this squashes the $1.54 billion in revenue in the same quarter last year. Needless to say these results pummeled analyst expectations. Wall Street only predicted a profit of 35 cents per share and revenue of $1.87 billion.

All of this was fueled by surprisingly strong Latin American sales of Roundup and had caused Monsanto to increase its year-end profit forecast $2.50-$2.60 a share from $2.20-$2.40 a share.

Increasing sales of Roundup in Brazil and Argentina means that the herbicide will deliver roughly $1 billion in gross profit by the end 2008 – this is higher than the $950 million it estimated in the beginning of December.

Monsanto said that total seed and genomics sales rose to $836 million from $680 million in the same quarter last year. Agricultural sales rose to $1.26 billion from $859 million a year ago.
These are absolutely astounding numbers. There is an obvious demand for the products that Monsanto offers. Technical this and chart that – Monsanto is a fundamentalist’s dream…

The Secret Weapon: The Product Pipeline
There has been huge progress in Monsanto’s research and development (R&D) arena. Monsanto has a number of new ideas in development and will be ready to deliver several new ground-breaking products to customers by 2012. Steve Padgette, Vice President of biotechnology at Monsanto says the following about the various R&D projects:

“It’s rewarding to see such innovation in the pipeline right now. This is the most progress I’ve seen in my 23 years at the company. Our data demonstrates these cutting-edge innovations can deliver new value to farmers well into the next decade.”

The following is a little bit of background on some of the new products under development at Monsanto:

• YieldGard VT PRO, one of the primary components of the SmartStax technology. It is primed to offer farmers a broader spectrum of insect control and improved durability when compared with the company’s first-generation corn borer offering. The second-generation corn borer technology is in Phase IV of the company’s R&D pipeline and currently awaiting regulatory approvals.

• YieldGard Rootworm III is designed to provide two modes of action for improved spectrum control and enhanced durability against the corn rootworm pest. The technology incorporates cutting-edge RNA interference technology and novel protein identification. RNAi is a mechanism used naturally by cells to regulate gene expression. By harnessing this natural machinery, RNAi technology can help plants protect themselves from insects.

• Omega-3 enriched soybeans, which are expected to offer a land-based source of essential Omega-3 fatty acids. This continues to demonstrate comparable consumer acceptability in recent results between SDA soy oil and conventional soy oil in food uses. The product also continues to demonstrate solid yield performance when compared to controls.

• Drought-tolerant cotton, which is designed to minimize risk in cotton farming by providing yield stability in water stressed environments. This has demonstrated strong performance across multiple gene leads. With these results in hand, Monsanto now believes there are a number of product leads to create a family of drought traits in cotton.

Well, I’m no farmer – that’s for sure, but even I can see the value in these new products. Drought-Tolerant corn? Land based Omega-3 fatty acids? (Which by the way are the fats that support the grey matter in your brain)

I don’t know about you, but this all sounds extremely positive to me…

The Oil Alternative…
With oil hitting $100 per barrel and the ever looming supply squeeze, many industry’s profits are being dwindled by higher transportation costs. Well for Monsanto, this is not the case…

Increasing oil prices have tossed up the demand for biofuels and production in Brazil, where Monsanto has about 80% of the corn seed market. As many of us are aware, Brazil is one of the world’s largest producers of ethanol…

The planting of additional acres in Brazil has, with out a doubt, increased revenues significantly for Monsanto in its most recent quarter. Even with the rapid growth in herbicide sales, “Round Up” sales are still directly tied to the amount of acres planted.

With acres of farmed land on the rise - due to increased demand for biofuels produced from crop products – not only will this escalate the amount of seeds Monsanto sells, but also the amount of herbicide (Round Up) as well.

The bottom line is that with the price of oil hitting new heights each month, the demand for alternative fuels will rise. Many of the alternative fuels out there are bio-based, and since Monsanto is neck deep in this industry – increased profits are bound to follow.

What are your opinions on Monsanto? Do you think it has the momentum to push passed $150 a share? Is Monsanto the next Google?

-Neil DeFaclo