One of Ben Graham’s favorite exercises was comparing stocks with one another. Ben Graham usually did this in several ways. One way was to compare two companies in the same industry. Another, as shown in The Intelligent Investor, was by comparing two companies who were alphabetically connected. The purpose of Graham using this exercise was to figure out which companies stock was cheaper.
In the past year, few companies have had a run like Monsanto (MON) and Potash (POT). Two companies in the agriculture sector who benefit from higher commodity prices, low stockpiles and government encouragement of alternative biofuel (ethanol). Monsanto’s stock price has skyrocketed with the current stock price being 142% off it’s 52 week low of $50. Recently, the market cap of Monsanto surpassed that of Home Depot (HD), who has been beaten down along with everything related to housing. Is Monsanto worth more than Home Depot?
Operating History via Standard & Poor’s Stock Reports
Founded in 1978, Home Depot is the world’s largest home improvement retailer, with revenues in excess of $90 billion. The company mainly operates retail warehouse-type stores that sell a wide assortment of building materials, home improvement and lawn and garden products.
Founded in 2000, Monsanto produces leading seed brands and develops biotechnology traits that assist farmers in controlling insects and weeds, and provides other seed companies with genetic material and biotechnology traits. Monsanto’s Roundup herbicides are used for agricultural, industrial and residential weed control, and are sold in more than 80 countries.
The Numbers
| Home Depot | Monsanto | |
| Price as of Feb 25, 2008 | $28.82 | $121.92 |
| Market Cap | 48 Billion | 64 Billion |
| Enterprise Value (EV) | 60 Billion | 66.61 Billion |
| Revenue (ttm) | 88.91 Billion | 9.12 Billion |
| Price/Earnings (ttm) | 11 | 56 |
| Forward P/E | 12 | 33 |
| Book Value/Share | $10.33 | $14.727 |
| EBITDA (ttm) | 10.27 Billion | 2.43 Billion |
| EV/EBITDA | 5.706 | 26.79 |
| Operating Cash Flow | 6.62 Billion | 2.25 Billion |
With Home Depot having 9x the revenue and 5x EBITDA, it clearly deserves a higher valuation. Unfortunately, Home Depot’s macro situation is not as rosy as Monsanto’s future earnings. Monsanto’s investors are betting on future earnings that may or may not earn. Either way, investing in Monsanto right now is a recipe for low returns. Comparing the balance sheet of the two companies you really see the disparity in value. For example, Home Depot reported current assets of $18 Billion on their latest 10-K. Home Depot’s current assets alone are worth more than Monsanto’s total assets and total liabilities combined! Warren Buffett once said, “Price is what you pay. Value is what you get.” Good luck Monsanto shareholders.
Disclosure: No position in Home Depot or Monsanto
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I like your analogy here. Home Depot will eventually come around. Unfortunately they burdened themselves with debt and bought back a bunch of shares at too high a price. I try to go for value too, but it is important to get value WITH at least some growth, at least wait for flattening. Still $25 + may be low enough, but we might see $20 or lower before its all over.. Of course on the other end of the spectrum , everyone and their broker want a piece of Monsanto, too hot, bound for at least some nasty pull-back at some point… Look for the next big thing.