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Is Jim Simons Quitting the Agricultural Industry?

November 07, 2013 | About:
Jim Simons is very well known for investing in the oil and gas industry, but his interests are also present in the agriculture industry. The closing of the soybean and corn harvest season in the U.S. and opening of the planting season in the southern hemisphere mark an important time for agricultural inputs. In this opportunity I will look at a seed and crop protection provider, Monsanto (MON), and a fertilizer producer, Intrepid Potash (IPI).

New Products and International Expansion

Monsanto has officially introduced the Intacta RR2 soybean trait in 2013. The product has been specifically developed for the southern hemisphere, and is marketed as the first-ever insect-protected soybean trait. The product evidences the gap the company opened between it and its competitors, even when carrying joint research and development with industry peers. The new product, however, has added a new chapter to the book of debates concerning GMO products.

The new product is yet to have an impact on Monsanto’s performance, and reported weak results for the fourth quarter of fiscal 2013. In addition to the performance expected from Intacta RR2’s introduction, the new agreement with The Climate Corporation will reinforce a positive outlook. Moreover, the agreement is said to be the beginning of the acquisition process, which aims at adding important technology for yield improvements.

Following global trends, Monsanto continues to push forward on developing countries. The push for new markets will help to ease the negative impact associated with the decision to stop asking for genetically modified seeds clearance in Europe. However, the road has been bumpy and legal issues continue to slow further development. India has turned into the new battleground for the company, where farmers have hotly contested the introduction of genetically modified cotton.

Financially, Monsanto is strong thanks to wide operating margins, rising revenues and strong cash flow. Currently the stock trades at 22.5 its trailing earnings, carrying a 75% premium to the industry average. Chris Davis and Steve Mandel, the two gurus holding the largest position, have reduced their stakes in the firm, and Jim Simons has followed suit. I do not share their pessimism but do not think this is the right time to start a long-term investment.

Potash Continues to Decline

Stock price for Intrepid Potash has been on a steady decline since the first quarter of 2011. And Uralkali’s decision to end the Belarus Potash Corporation dimmed future prospects. The last quarter report issued indicated a 45% reduction on net sales year over year, aggravated by an 18% drop in potash prices over the same period. Moreover, an insider stock purchase completed on Nov. 4 seemed to give the company some air as the stock price rose by 11%. Analysts, however, continue to feel pessimistic about future performance.

Looking ahead potash prices are not expected to climb much, gravely questioning the future of Intrepid Potash as a pure play firm. Hence, the company has lost its economic moat and return on capital invested is expected to fall below costs during the next five years. Further, no growth will be seen in the next decade should the firm continue operating with the current business structure. Not surprisingly, future prospects remain weak even when adding to the equation a recovery on sales volume.

On the upside, as US. potash producer Intrepid Potash pays lower royalties than its Canadian peers. However, the benefit is short from gaining the firm any real competitive advantage after the end of the Belarus Potash Corporation. Also, the use of solar energy has ceased to be an advantage and turned into a weight for return on capital invested. Going ahead, the firm will need to restructure its business and adjust to new market conditions. For the time being, there are no catalysts that may augur a more promising future.

The balance sheet for Intrepid Potash is troubled. Operating margins, revenues and cash flow have greatly deteriorated. Currently the stock trades at 28 times its trailing earnings, carrying a 122% premium to the industry average. The two gurus holding the largest position, Chuck Royce and Jim Simons, continue to reduce their stake. I share their pessimism simply because the company has been basically taken out of the business by Uralkali’s decision.

The Obvious Choice

Intrepid Potash doesn’t hold encouraging prospects, mainly because its business model was based on high potash prices. Hence, my choice is Monsanto. However, the current stock price does not offer an attractive entry point for investors. The good news is that stock price is on a steep decline, and might open a window of opportunity to long-term investors. So, I recommend keeping an eye on the stock to act quickly when the opportunity arrives.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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