Friday, January 21, 2005

Wall Street's bet on Monsanto

I had planned to discuss an extensive new report from the Center for Food Safety on Monsanto's campaign to enforce its "property rights" viz. farmers. But I haven't had time to read through the 84-page document. Before I get to that, sometime next week, I'll go into a bit more depth about what Monsanto's stock-market performance is telling us about its prospects in the struggle over GMO.

Here's the company's stock chart over the past year, compared to the S&P 500. (Market watchers use the S&P, an index containing the 500 most valuable US stocks, as a broad indicator of how the overall stock market is doing.) The red line on the chart represents the S&P's performance, while the blue line represents Monsanto's share-price growth. Note that while the S&P has essentially flatlined over the past year, Monsanto's shares have risen by 100 percent, or doubled in price. Now, investors buy stocks based on expectations of future profit growth, not past performance. One way to read Monsanto's chart, then, is that investors are expecting its earnings to grow much faster than the earnings of the average large U.S. company. And since, as I show in my previous post, Monsanto relies increasingly on GMO for its profits, the stock's sharp recent rise represents a calculated bet on widespread acceptance of biotech crops.

Another indication that the financial community is betting big money on Monsanto in its fight with the environmentalists is what analysts call "valuation." To understand valuation, think of a small business--for example, an ice cream shop. Say your local ice cream shop generated $100,000 last year in profit. How much would it be worth, if the owner wanted to sell it? Well, it would depend on whether its annual profit is holding steady, growing, or shrinking. If profit were holding steady, the shop might fetch $500,000, or five times last year's profit; if profits could reasonably be expected to grow, say, 10 percent a year, someone might shell out, say, $800,000, or eight times earnings. If profit is shrinking, the price might be something like $200,000, or two times earnings.

Similar calculations come into play when big-time investors buy stocks. Get this: Monsanto is currently trading at 70 times last year's earnings, while the average company in the S&P 500 trades at about 18 times earnings. That means that Wall Street is expecting (or "pricing in," in trader argot) serious growth from Monsanto.

Now, contrary to '90s-era popular-media hype, the stock market is not driven by sunken-eyed day traders or grandmas gambling away their retirements. What drives stock prices are the decisions of huge institutions--retirement funds, mutual funds, hedge funds. These places are run by people who manage billions of dollars and buy and sell millions of dollars worth of a single stock in a single swoop. They scour the market for growth opportunities, and they tend to do their homework. They're often wrong--in the '90s, they wildly overvalued tech stocks. But they're a lot more conservative about valuation today. If they thought biotech crops faced a bleak future, they would dump Monsanto instantly, as they did a couple of years ago, when GMO opposition seemed to be gaining force. Instead, they're bidding up Monsanto dramatically.

That's bracing news for anyone concerned about the future of small-scale, sustainable farming.

Note: the Barron's article mentioned in my previous post makes clear that Wall Street is very excited about Monsanto's global "growth opportunities." A future blog will discuss the company's activities in Brazil and Argentina, the world's emerging industrial-ag production centers.

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