Company Profile
Monsanto was once a major chemical company with a broad pedigree ranging from saccharine to sulfuric acid to Agent Orange and DDT. Monsanto was absorbed into Pharmacia Upjohn in 2000, which kept its pharmaceutical products and spun off the agricultural products business into a "new" Monsanto in 2002. Today"s Monsanto provides a set of leading-edge, technology-based agricultural products for use in farming in the United States and overseas. The company broadly views its business as providing better quality foods and animal feedstocks while reducing the costs of farming.
The company has two primary business segments: Seeds and Genomics, and Agricultural Productivity.
The Seeds and Genomics segment produces seeds for a host of crops, most importantly corn and soybeans, but also canola, cotton, and a variety of vegetable and fruit seeds. Most of the seed products are bioengineered to provide greater yields and to be more resistant to insects and weeds. Familiar to many consumers, especially those who travel in the Midwest, is the DeKalb seed brand, but there are many others.
The Agricultural Productivity segment offers glyphosate-based herbicides, known as Roundup to most of us, for agricultural, industrial, and residential lawn and garden applications. Beyond this market-leading product, the division also offers other selective herbicides for control of pre-emergent annual gra.s.s and small seeded broadleaf weeds in corn and other crops. The company owns many of the major brands in both seed and herbicide markets.
The company also partners with other agricultural and chemical companies like Cargill, BASF, and Biotechnology, Inc., to develop other high-tech agricultural and food-processing solutions.
Financial Highlights, Calendar Year 2010 (Fiscal Year ended August 31)
Monsanto had an especially weak and discomforting 2010. Weakening demand in many agricultural markets, which started in 2009, continued into the year. Worse, expiring patents on the glyphosate products, news of immunity to the chemical developing in certain weeds, and new compet.i.tion, especially in cheaper foreign subst.i.tutes, turned into a top-line routa decline of 10 percent in sales for the year. Earnings softened to $2.41 per share from $4.41 from the previous year with deficits in two of the four quarters (as a seasonal company, this isn"t as alarming as it sounds), as gross margins collapsed from about 34 percent to the 24 percent range. Guidance calls for a gradual earnings recovery to $2.75$2.80 per share for FY2011, with revenues recovering about half of what was lost in 2010.
Reasons to Buy
The expiration of the Roundup "monopoly" combined with news of its attenuated effectiveness was a double whammy, especially for a company whose profits were so dependent on the product and its combination sales with glyphosate-resistant seed stocks. The company was forced to lower product prices to keep market share. This is the bad news; the bigger picture shows Monsanto still as a market leader in technology-based agricultural products with a strong track record for innovation and a big head start on most compet.i.tors. The company is stressing its biotechnology-rich Seeds and Genomics products while the Agricultural Productivity unit brings new formulations to market and reduces costs on the glyphosate products to bring them in line with the newer, lower prices. The stock dropped from the 80s to the mid-40s during the FY2010 consolidation period, but recovered quickly. We still feel this is a premier technology company aimed at a sector of primary global importancethat is, agricultureand is a good place for invested capital, especially long term.
Reasons for Caution
Clearly, Monsanto didn"t antic.i.p.ate the negative effects of the adverse news on the glyphosate products. The strong lock they had on their markets seemed to disappear overnight, and they were caught with their proverbial overalls down. Lesson learned, we hope. Monsanto"s future success will continue to depend on agricultural innovationbut also on being the best player in compet.i.tive markets with a diverse product portfolio. Astute investors must hold them to that standard and walk away if they become too dependent on one product or system once again.
GROWTH AND INCOME.
NextEra Energy, Inc
Ticker symbol: NEE (NYSE) S&P rating: A- Value Line financial strength rating: A Current yield: 3.7%
Company Profile
FPL Group, formerly Florida Power & Light, changed its name to NextEra Energy, Inc. in May of 2010. Such a name change is hardly a first in the corporate world, but it does reflect how the company operates and how it sees itself: as one of the cleanest existing energy providers with an eye (and a subsidiary) dedicated to the future of large scale alternative energy.
NextEra is a leading energy holding company with 2010 revenues of more than $15 billion, approximately 43,000 megawatts of generating capacity, and more than 15,000 employees in twenty-eight states and Canada. Headquartered in Juno Beach, Florida, FPL Group"s princ.i.p.al operating subsidiaries are NextEra Energy Resources, LLC, and Florida Power & Light Company, one of the largest rate-regulated electric utilities in the country. FP&L serves 4.5 million customer accounts in Florida. Through its subsidiaries, FPL Group collectively operates the third largest U.S. nuclear power generation fleet.
NextEra Energy Resources, LLC (formerly FPL Energy, LLC), FPL Group"s compet.i.tive energy subsidiary, is a leader in producing electricity from clean and renewable fuels, and, unlike many other alternative-energy driven businesses, is a viable standalone business ent.i.ty. It has 115 facilities in twenty-six states and 4,700 employees, and operates solar and wind farms, nuclear energy facilities, and has gas infrastructure operations. With 2010 revenues just over $4.6 billion, the subsidiary accounts for nearly a third of NextEra"s total revenueand nearly half of its profits. The subsidiary has 8,298 megawatts of wind generation capacity alone, representing about 20 percent of the company"s total generation capacity. The generating a.s.sets of NextEra represent over 18,000 megawatts of capacity. FPL FiberNet, LLC, provides fiber-optic services to FPL and other customers, primarily telecommunications companies in Florida.
FP&L is recognized as one of the "cleaner" producers in the United States, with just over half of its generation coming from natural gas, about 21 percent from nuclear sources, and less than 15 percent coming from coal and oil. By contrast, coal makes up 50 percent of the fuel mix for electricity generation nationwide. Additionally, NextEra Energy is the largest owner and operator of the wind and solar generating facilities in the United States.
Financial Highlights, Fiscal Year 2010
Revenues in FY2010 declined slightly to $15.3 billion while earnings per share rose about 19 percent from $3.97 to $4.74. The decline in revenue is due primarily to the decrease in usage by residential customers. Going back to FY2000, FPL"s average annual customer growth has been 1.8 percent, but starting in 2007, that growth has essentially stopped, likely due to the credit/housing crisis that affected many fast-growth real estate markets such as south Florida. For 2011, the company is absorbing the costs of bringing some new capacity online and a one-time mark-to-market benefit in 2010, and now expects earnings in the $4.25$4.55 per share range for the year. The company also stated that it expects earnings to grow in the 57 percent range from 2009 through 2014.
Reasons to Buy
For those who believe that alternative energy is the future for large-scale power generation, NextEra is the best play available. The Recovery Act of 2009 contains a number of tax incentives for the deployment and use of renewable and nuclear sources, and NextEra is well positioned to take advantage. Its total current investment in wind resources is over $12.5 billion, and it added 1,238 megawatts of wind generation in 2010 with plans to add 1,0001,500 megawatts in each of 2011 and 2012. Solar energy projects, including a large one in Spain, are also coming on line, with a recent California Public Utilities Commission agreement to buy 250 megawatts from a project known as "Genesis" being one recent win.
NextEra is the largest provider in a growing alternative energy market, and has been one of the best-performing stocks in the utility market over the past several years.
Reasons for Caution
The company"s FP&L subsidiary is still a regulated utility, and has run into some trouble with Florida regulators, particularly in pa.s.sing on the costs of a new $900 million gas-fired plant. An agreement was reached but allowed no further rate increases until 2012. Adding some additional headwind is the state of the Florida real estate market and overall economy. The dividend yield, while still healthy for a company with future growth prospects in an up and coming industry, is still low by current utility standardsreflecting in part the fact that investors have already put a lot of energy into this stock and the price accounts for its prospects. Buyers should look for good entry points.
AGGRESSIVE GROWTH.
NIKE, Inc.
Ticker symbol: NKE (NYSE) S&P Rating: A+ Value Line financial strength rating: A++ Current yield: 1.5%
Company Profile
NIKE"s princ.i.p.al business activity is the design, development, and worldwide marketing of footwear, apparel, equipment, and accessory products. NIKE is the largest seller of athletic footwear and athletic apparel in the world, but a big part of the story is how they are extending beyond traditional footwear and apparel. Their products are sold to retail accounts, through NIKE-owned retail outlets, and through a mix of independent distributors and licensees in over 180 countries around the world.
NIKE does no manufacturingvirtually all of their footwear and apparel are manufactured by independent contractors outside the United States, while equipment products are produced both in the United States and abroad.
NIKE"s shoes are designed primarily for athletic use, although a large percentage of these products are worn for casual or leisure purposes. Their shoes are designed for men, women, and children for running, training, basketball, and soccer use, although they also carry brands for casual wear.
NIKE sells apparel and accessories for most of the sports addressed by their shoe lines, as well as athletic bags and accessory items. NIKE apparel and accessories are designed to complement their athletic footwear products, feature the same trademarks, and are sold through the same marketing and distribution channels.
NIKE has a number of wholly owned subsidiaries, including Cole Haan, Converse, Hurley, and Umbro that variously design, distribute, and license dress, athletic and casual footwear, sports apparel, and accessories. In FY2009, these subsidiary brands together with NIKE Golf accounted for approximately 43 percent of total revenues.
The company has more than 23,000 retail accounts in the United States. The company makes substantial use of a "futures" ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. In FY2009, 87 percent of their U.S. wholesale footwear shipments of NIKE-branded products were made under the futures program. About 50 percent of the company"s total sales are overseas, and NIKE is one of the strongest U.S. consumer brands abroad.
Financial Highlights, Fiscal Year 2010
NIKE"s sales declined just a shade in FY2010, in what was an off year for most of the garment and athletic wear industry due to decreased discretionary spending (we should also note that the fiscal year ends May 31, so FY10 actually included a lot of calendar 2009). The company projects returns to a high single-digit revenue growth in FY2011, bolstered by international sales and the release of important new products and brands, such as the LeBron line of footwear. Backlogs are strong and retail futures orders have exceeded projections, and the company has been increasing production rates. Revenues are projected at $20.4 billion for FY2011, with earnings in the $4.40 range. The company also increased its dividend 15 percent in late 2010. The company has almost no debtlong-term debt is $440 million against a market capitalization of $41 billion.
Reasons to Buy
Why buy NIKE? In a word, brand. The NIKE brand and its corresponding "swoosh" are one of the most recognizedand sought afterbrands in the world. It is a lesson in simplicity and image congruence with the product behind it. NIKE doesn"t sit still with it; rather, they are learning to leverage it into more products outside the traditional athletic wear circuitgolf clubs, golf b.a.l.l.s, even a new line of GPS watches and apps. Further, NIKE doesn"t just limit the brand appeal to athletes: Slogans like "Just Do It" and "If you have a body, you"re an athlete" emphasize the appeal and lifestyle across all segments of the population. We think this is drop-dead smart.
Of course, solid brand and brand reputation lead to category leadership and hence, higher profitability, and NIKE has finished far ahead of the pack in this area too. The brand and "moat" created by the brand seem to have nowhere to go but forward, and improved manufacturing efficiencies, strong channel relationships, and international exposure all keep the company moving faster in the right direction. Despite its size, the company continues to deliver double-digit earnings, cash flow, and dividend growth even as revenues have matured into the high single-digit range. We like the combination of protected profitability through brand excellence, combined with a clean conservative balance sheet, providing a good combination of safety and growth potential.
Reasons for Caution
Two things could put hurdles in NIKE"s path. First, the company is continually in the newsand the rumor millfor "unfair labor practices" and child labor violations in some of its foreign manufacturing plants. The company doesn"t actually own or operate these plants, but the rumors can stick nonetheless. A particularly egregious violation could tarnish the brand but there have been none to date. Second, the stock price has run along in lockstep to the good news, so obvious buying opportunities have been hard to find. We also feel the company could return a little more cash to shareholders, although the company has bought back about 8 percent of common "B" shares since 2005.