U.S. Markets open in 7 hrs 25 mins

Why Is Monsanto Hated?

Richard Saintvilus

NEW YORK ( TheStreet) -- I recently wondered if Monsanto can hold its momentum. My inbox was immediately filled with a barrage of righteous anger from people proclaiming this company is evil.

I get that there are constant battles involving the company, which produces seeds and other agricultural products, and how these products impact upon farmers. In fact, this is one of the most popular bear arguments on the market today. But it's getting old. Readers also raise concerns about fundamental ideals as to whether or not Monsanto is "good for nature." It goes on and on.

As an investor and analyst I can appreciate that management has been raking in the profits. Strictly from an investment point of view, it's hard to argue this company doesn't know how to harvest growth (pun intended). For investors who believe in this company, the gains should continue. But that's not to say this company is flawless.

Monsanto posted solid second-quarter results showing the strength of its global business. Revenue surged 15% year-over-year to $5.47 billion, which was 5% higher than analysts had predicted. The strong performance was helped, in part, by 16% revenue growth from Monsanto's global corn business.

All of this translated to 13% increase in earnings, which also arrived 6% higher than Street estimates. The company earned $1.48 billion or $2.74 per share, from $1.21 billion, or $2.24 per share in the year-ago quarter. These numbers are good, yes. But I was not ready to jump for joy. For that matter, I wouldn't encourage bulls to do the same, either -- at least not yet.

For example, while the 13% growth is indeed impressive, Monsanto is coming off an excellent first quarter, during which revenue shot up almost 21%. The company then beat Street estimates by 10%. So, despite the strong second-quarter showing, Monsanto actually answered the question regarding momentum. Perhaps it is slowing.

I also raised the concern regarding the company's performance in soybeans, which declined 5% in the first quarter. Unfortunately, there wasn't much improvement this time around as soybeans dropped again, this time by almost 2%. What's more, the declines in cotton seed and traits accelerated 9%.

In other words, although management posted strong top-line results, there are still some weaknesses that need to be addressed.

Monsanto guided as if it expects to continue to grow market share, raising full year earnings-per-share guidance to a range of $4.40 to $4.50. These numbers are expected to be two cents higher on an as-reported basis. Plus, management also affirmed prior free-cash-flow guidance $1.8 billion to $2 billion.

Investors rejoiced, sending the stock to a new 52-week high of $107. These are solid numbers indeed. But to the extent they make up for some of the underlying weaknesses that I've highlighted above, I don't think that's justified, especially since the Street was modeling for full-year EPS of $4.58 per share.

Bottom Line

That said, there are still reasons to be bullish this company in the long term. The company's product pipeline is unmatched. Fundamentally, the company remains solid from the standpoint of revenue growth, financial position with reasonable debt levels and an impressive record of earnings per share growth with expanding profit margins.

At $105 per share, the stock's not cheap, given its P/E of 22. Even if fair value were to go higher to the $110 to $115 range, which is very realistic, it still doesn't present an exciting premium. But this is a well-managed company that can post some strong long-term gains with some operational improvements.

Investors looking for exposure to agriculture should really consider this name. Finally, the company deserves a break. Monsanto is far from the "evil-doer" many investors are making it out to be.

Ask yourself, since when has feeding the world become such a bad thing?

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

It's Official: Action Alerts PLUS beats the S&P 500 with Dividends Reinvested! Cramer and Link were up 16.72% in 2012. Were you? See what they are trading for 14-days FREE.