Between 1950 and 2000, a period that included both privately held and public trading for Monsanto stock, the compounding rate was 18.5%. It was one of the businesses that was so inherently lucrative that it was able to compound at a rate that almost tracked Warren Buffett’s accomplishments with Berkshire Hathaway stock.
The secret to Monsanto’s business success is that it was able to participate in the “toll booth” business model, which Kinder Morgan founder and CEO Richard Kinder has described as follows: “If you own a toll road, you don’t care how many passengers are in each car or what kind of car it is. You just want as many cars to move down the road as possible, and you make certain that they pay their tolls.”
In the case of Monsanto, it was able to collect a significant “toll” from each acre of land farmed in the United States over the half-century.
Imagine you are a soybean farmer. You want to plant 1,000 acres of soybeans. You look to Monsanto to meet your needs—a 50 pound bag, which is now sold as 140,000 seeds—costs $70 and should provide the seeding for an acre of island. If you need a weed killer or a pesticide, that will also cost on average $10-$15 per acre. At $85 per acre, Monsanto stands to collect $85,000 each year from the farming efforts.
And what is notable is that Monsanto’s collection rate per acre is somewhat resistant to the various fluctuations in the price of crops. If soybean prices crumble such that it becomes more sensible to plant corn, Monsanto has been right there to sell corn seed and pesticide. Regardless of whether you were prospering or struggling, growing crop x or crop y, Monsanto has been to collect close to $100 per acre of farming.
The costs of maintaining this advantage are small (research and development to maintain the most desirable seed and pesticide products for farmers) compared to the rewards (the collection of $100 annually for each acre of farmland that relies upon Monsanto’s products).
You might wonder: How can I identify these types of investments ahead of time?
The answer is that you should look at your industry, and find out which businesses “everyone has to use.” If you operate an ice cream parlor, you’re going to need to buy toppings from Mars, Inc. and Hershey. Mars isn’t publicly traded, but Hershey. Setting aside a small portion of your profits to invest in the indispensable firms in your industry falls squarely in the quadrant of “intelligent behavior.”
A farmer, recognizing how much money he was spending on Monsanto products each year, could have taken advantage of this knowledge by putting $2,000 into shares of Monsanto stock year. Over a fifty-year lifetime of making this decision, the end result would have been a $15 million position in Monsanto stock. Essentially, the most lucrative thing from the man’s career as a farmer would have been gaining an insight into the extreme wealth-builders in the agricultural products industry.
And even if someone wasn’t a farmer, a rudimentary investment analysis of Monsanto stock would have also revealed the strength of its business model. From 1980 onward, there were only four years in which earnings per share did not grow on a year-over-year basis. There was no rolling ten-year period in which Monsanto failed to grow earnings per share at an average rate of at least 10% annually.
For anyone who paid attention, Monsanto was there building crazy wealth. It showed up in the exploding revenues and consistently high earnings per share growth. It was also apparent to those who paid attention to Monsanto’s business model, noting how much farmers had come to rely upon its seeds and pesticides and needed to spend a significant amount of money each year on Monsanto’s products.
Originally posted 2018-06-13 01:20:39.