In the agriculture industry, public companies’ valuation multiples depend primarily on two factors: growth and risk. The following table shows the forward valuation multiples of five agriculture companies: Monsanto (MON), Mosaic (MOS), Agrium (AGU), CF Industries (CF) and Potash Corp. (POT).
Forward valuation multiples (using year 2013 estimates) were used to reflect earnings growth of each company in 2013. For the year 2013, analysts are forecasting earnings to grow for MOS, AGU and MON, while estimating almost zero growth for CF and AGU. Stripping out growth factors, what remains in the valuation multiple are risks.
Monsanto has a higher multiple because it is perceived to be a less risky company with a more sound and sustainable business model. Its business model is to develop genetically enhanced seeds so that farmers will be able to generate higher yields out of them. As these seed discoveries are made in-house, they are protected by patents, which shields Monsanto from competition and allows the company to maintain a healthy margin. Over the past 10 years, Monsanto’s gross margin has never fluctuated 5% more from an attractive 50%.
Investors sometimes think that companies trading at premiums should be avoided, because premium valuations can reduce potential return. This is not necessarily true. As long as the company’s premium reflects lower risk, and earnings continue growing at a higher rate than the company’s peers, the share price will also probably continue to rise.
Next, Potash Corp. (POT), has a higher valuation than Mosaic (MOS), because of its dividends and diversified portfolio of fertilizers. While Mosaic focuses on phosphate and potash, Potash Corp. (POT) also specializes in nitrogenous fertilizers. Potash Corp.’s 2011 fertilizer revenue consists of nitrogen based (25.9%), phosphate based (28.4%) and potash based (45.70%)
Additionally, the Potash Corp. has a long history of paying out dividends. All of those qualities reduce the risk an investor may take by investing in the company, which allows the company to trade at a premium to its competitors. As long as Potash Corp. keeps itself diversified and pays a consistent dividend, the premium will be sustained.