Strong earnings prospect rates Monsanto a `buy'

October 21, 2007|By Andrew Leckey | Andrew Leckey,TRIBUNE MEDIA SERVICES

Can my shares of Monsanto Co. continue to rise at their current pace or should I be worried?

- R.M., via the Internet

The world's leading producer of a wide range of seeds has found farmers more willing to spend money on premium corn seed this year.

That's because farmers are benefiting from the highest corn prices in more than a decade because of global demand for food and for fuel such as ethanol. U.S. corn production is expected to rise 26 percent this year, according to the Agriculture Department.

"Triple-stack" corn from seeds with three genetically added traits is showing especially strong gains. Monsanto plans to increase its production capacity for such seeds by 50 percent.

A primary goal of genetic modification is to reduce risks such as weed and insect infestation. But attitudes of consumers throughout the world toward genetically modified food will be a significant factor in determining the company's long-term growth. Farmers base their planting on their perception of public demand for their crops.

The firm's continued ability to bring new products to market ahead of competitors also will be crucial.

Monsanto shares are up 68 percent this year, after gains of 35 percent last year, 40 percent in 2005 and 93 percent in 2004. The company, which has authorized a 40 percent increase in its dividend, has a strong balance sheet and cash flow.

Sales of Monsanto's Roundup herbicides, which help control weeds, have risen. The company has been expanding international sales of all its products and is expected to make especially strong gains in South America and Europe.

It has been acquiring smaller seed companies and forging partnerships with international chemical companies. It also recently entered a partnership with the Israeli biotech firm Evogene Ltd.

The consensus analyst rating on shares of Monsanto is a "buy," according to Thomson Financial. That consists of four "strong buys," four "buys," and five "holds."

In Monsanto's recently completed fiscal year, earnings excluding discontinued operations and acquisition-related costs increased 44 percent. Although it posted a loss of $210 million in its fourth quarter, it historically posts a loss in the fourth quarter because most planting has already been completed.

Earnings are expected to increase 48 percent for the fiscal year that ended in August and 23 percent this fiscal year. The five-year annualized growth rate is projected to be 28 percent compared with 11 percent projected for the agricultural chemicals industry.

I own shares in Oakmark Equity and Income I Fund. What do you think of it?

- R.C., via the Internet

It offers the stability of high-quality bonds and value-oriented stocks, with the added benefit of low expenses. About 60 percent of the fund is currently in stocks, 33 percent bonds and the rest cash.

Co-managers Clyde McGregor and Edward Studzinski are confident about their fund's prospects: They invest significant amounts of their own money in it.

The $13 billion Oakmark Equity and Income I Fund (OAKBX) has gained 16 percent in the past 12 months and has a three-year annualized return of 12 percent. Both results rank in the top one-fifth of moderate stock-and-bond funds.

"I recommend this fund because it has a sensible strategy, well-executed over time with outstanding performance," said Paul Herbert, analyst with Morningstar Inc. in Chicago. "Since the stock portfolio has 40 to 50 stocks and they aren't necessarily big caps, it might lag in a return to large-cap leadership, but I don't think this is worth worrying about."

To be on the safe side, Oakmark Equity and Income I favors companies with plenty of cash, and its bonds are mostly short-term Treasuries.

McGregor has been portfolio manager since the fund's inception a dozen years ago and Studzinski joined him as co-manager seven years ago. Harris Associates, the fund's adviser, has a quality team of analysts, a reputation for attracting top managers, a clean regulatory history and excellent shareholder communications. Annual bonuses of its portfolio managers depend on the performance of their funds.

Among its major concentrations, energy represents 20 percent; consumer goods, 18 percent; media, 17 percent, and industrial materials, 15 percent. Average bond credit quality is AAA with duration of 3.2 years. Largest portfolio holdings include U.S. Treasury notes, XTO Energy Inc., EnCana Corp., Nestle SA, General Dynamics Corp. and EchoStar Communications Corp.

This "no-load" fund requires a $1,000 minimum initial investment and has a low annual expense ratio of 0.86 percent. New investors must purchase its shares directly from Oakmark Funds, an indication the fund is seeking sensible asset growth in line with investment opportunities.

I want to buy a U.S. Savings Bond for my newborn nephew to use for college someday. What's the best kind of savings bond for that purpose?

- K.R., via the Internet

Your choices are a Series I bond or a Series EE bond.

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