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Highlights of Highfields Capital Management's positions in 1Q14

Part 2
Highlights of Highfields Capital Management's positions in 1Q14 (Part 2 of 7)

Highfields Capital buys a large new position in Monsanto

Highfields Capital Management and Monsanto

Highfields Capital started new positions in Monsanto Co. (MON), Teva Pharmaceutical (TEVA), eBay Inc. (EBAY), and Exxon Mobil (XOM). The top positions the fund sold were United Parcel Service (UPS) and FedEx Corp. (FDX).

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Highfields Capital initiated a large new position in Monsanto Co. (MON) that accounts for 3.88% of the fund’s 1Q 2014 portfolio.

Monsanto Co. is the world’s largest seed company. It’s a leading global provider of technology-based solutions and agricultural products that improve farm productivity and food quality. The company manages its business in two segments:

  1. Seeds and Genomics
  2. Agricultural Productivity

Through its Seeds and Genomics segment, Monsanto produces seed brands, including DEKALB, Asgrow, Deltapine, Seminis, and De Ruiter. The segment also develops biotechnology traits that assist farmers in controlling insects and weeds and precision agriculture to assist farmers in decision making. The Seeds and Genomics segment also provides other seed companies with genetic material and biotechnology traits for their seed brands. Through the Agricultural Productivity segment, Monsanto manufactures the Roundup and Harness brands of herbicide as well as other herbicides.

The St. Louis–based Monsanto said in its annual filing that “approximately 46% of our total company sales, 41% of our Seeds and Genomics segment sales and 57% of our Agricultural Productivity segment sales, originated from our legal entities outside the United States during fiscal year 2013.” Net sales increased 10% to $1,357 million in fiscal year 2013 compared to fiscal year 2012. The main contributor to the increase was both its global Roundup and other glyphosate-based herbicides and corn businesses.

The company has constantly seen protests worldwide over its GM (genetically modified) seeds due to their possible effects on human health. News reports in March said that France banned the sale, use, and cultivation of Monsanto’s MON 810 GM maize over environmental concerns. A recent report said European Union environmental ministers approved a proposal that would allow individual states to decide for themselves about growing genetically modified crops. The anti-GMO (genetically modified organism) movement is also in favor of enacting laws that would require food companies that use GMOs to appropriately label its products. The company’s main peers include Syngenta (SYT) and DuPont (DD).

Climate Corp acquisition to expand Monsanto’s offerings

Last year, Monsanto acquired The Climate Corporation for a cash purchase price of approximately $930 million. The release said the “acquisition is expected to expand on The Climate Corporation’s leadership in the area of data science, which represents a $20 billion opportunity, and will immediately expand both the near- and long-term growth opportunities for Monsanto’s business and Integrated Farming Systems platform.” The Climate Corp. has built the agriculture industry’s most advanced technology platform combining hyper-local weather monitoring, agronomic data modeling, and high-resolution weather simulations to deliver a complete suite of full-season monitoring, analytics, and risk-management products. The company offers support tools that could help farmers boost yields on existing farmland and better manage risks that occur throughout a crop season.

Monsanto’s corn and soybean businesses drive strong results

Monsanto’s fiscal 2Q 2014 results beat earnings and revenue estimates. The company said solid growth from its core seeds and traits business, including the expansion of its global corn and soybean businesses, drove results. According to the release, “Net sales for the quarter increased $360 million to $5.8 billion in the three-month comparison driven in part by solid growth in both its soybean and corn portfolios. For the first six months, net sales increased to approximately $9 billion. After delays in the early part of the quarter from winter weather on logistics in the Northern Hemisphere, shipments in the company’s seed business improved in the latter part of the quarter, avoiding any significant timing impacts from weather in the quarter.” The company’s second quarter EPS (earnings per share) were $3.15 on an ongoing and as-reported basis, compared to EPS of $2.73 on an ongoing basis and $2.74 on an as-reported basis in the same quarter last year.

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Eastern Europe and Latin America offer growth opportunities

Sales in the Seeds and Genomics segment for the second quarter were $4.6 billion, an increase of $302 million over the same period last year. Monsanto said its global corn and soy businesses have led the Seeds and Genomics segment’s performance. Soybean sales were driven by increased licensed trait revenue in the United States and the launch of Intacta RR2 PRO, primarily in Brazil. Net sales for the Agricultural Productivity segment in the first half of fiscal 2014 increased $341 million over the corresponding period last year due to increased sales of Roundup and other glyphosate-based herbicides in the United States, Latin America, and Europe. Management said on the earnings call that the company “hit strategic milestones this year” in Latin America, adding that despite the tensions in Ukraine, “one of the most significant opportunities this year comes from the broader Eastern European market.”

Monsanto confirmed its fiscal year 2014 ongoing earnings per share guidance of $5.00 to $5.20. Full-year 2014 EPS guidance on an as-reported basis is expected in the range of $5.02 to $5.22 per share. The company noted that the guidance incorporates the effects related to agricultural industry headwinds, including currency fluctuations and lower corn acres in some key markets. The company estimates a $0.15-to-$0.20 full-year EPS effect incorporated into its guidance, largely driven by the currency effects. Monsanto also continues to expect strong operational growth from its core business, reflected in mid-to-high-teens growth in EBITDA.

Monsanto drives shareholder value via buybacks and dividends

The U.S. biotech giant said it spent an additional $203 million on share buybacks in the second quarter. The company has used more than $1.5 billion for share buybacks over the last 12 months. The board also declared a quarterly dividend of $0.43 per share.

Fitch said in a release back in January that Monsanto “has R&D-driven expertise in plant biotechnology that enables high profit margins and strong cash flows. The company’s portfolio benefits from patent protection for most of its key products which creates high barriers of entry for new market entrants. In addition, Monsanto licenses its technologies and traits to its competitors. These agreements generate a recurring royalty stream that further supports the company’s profitability.” It added “Corn planting in the U.S. may be lower in 2014 than in 2013 due to lower corn prices, but Fitch expects Monsanto’s corn seeds and traits gross profits to grow due to U.S. farmer demand for new seeds and traits and growing hybrid corn planting in South America.”

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