Streetwise for Sunday April 12, 2009

Streetwise

Lauren Rudd

Sunday, April 12, 2009

Time To Step Up To The Bar

If you have not already done so, now is time to step up the bar and take responsibility for your financial future. Yes, Wall Street has been volatile of late and the major players have shown little inclination to do anything but line their own pockets and the rest of the world be damned.

Not to ruin your day but the financial markets have always been driven by greed, as are most markets. Furthermore, the wealthiest are often the greediest. This is no sudden epiphany; it has been so throughout history. Technology and time have merely changed the way and speed with which we do business, not the seemingly insatiable desire for ever increasing amounts of wealth.

However, the Street’s antics should not be an impediment to your investment decisions. When you invest in individual stocks you are not buying the market; or Wall Street or the continually touted Dow Jones industrial average. Instead, you are creating partnerships with approximately 12-15 high quality companies whose projected future success coincides with your analysis of their prospects.

Selecting candidates is not rocket science. If you have the wherewithal to be able to write your name and address and can use a telephone or a computer then you are already half-way there. Now all that is left is to steer your search in the direction of large, dividend paying, blue chip companies. And it is especially helpful if they are under appreciated. A good example is Monsanto (MON), a company not mentioned here for two years. Meanwhile, Monsanto has provided shareholders with a 14 percent return year-to-date and an 86 percent return over the past three years.

For its 2009 fiscal second quarter, Monsanto reported sales of $4 billion, an 8 percent increase over the same period a year ago. Key drivers were corn and soybean seeds and the company’s traits businesses. A drop in Roundup herbicide sales did hurt results a bit. However, Roundup revenues normally rise during the third and fourth quarters. For the first half of its fiscal year, Monsanto chalked up $6.7 billion in sales, a 16 percent increase when compared to a year ago and a new company record.

Net income for the quarter was a shade light at $1.1 billion, a decrease of 3 percent when compared to a year ago. However, for the 6 month period, Monsanto’s net income rose 19 percent to $1.6 billion.

Earnings per share for the second quarter came in at $1.97, while for the six months the number was $2.96. Free cash flow for the first half of the fiscal year totaled $1.1 billion, as compared to 1.5 billion for the same period a year ago. The improvement in earnings was offset somewhat by higher inventory levels. Nonetheless, Monsanto’s earnings guidance for the 2009 fiscal year is $4.23 to $4.33 per share, with free cash flow of about $1.8 billion.

Calculating the intrinsic value of the shares, using a discounted earnings approach and an earnings number of $2 billion, along with an earnings growth rate of 15 percent and a discount rate of 15 percent, results in a net present value for the company's next 10 years of earnings of $20.24 billion.

For earnings beyond the 10th year, I used a growth rate of 6 percent and a discount rate of 12 percent. The result is a continuing value of $35.76 billion. Add those two figures together, subtract long-term debt of $170.40 billion and divide by the outstanding shares (545.8 million). The result is a per share intrinsic value of $99.47.