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Monsanto Battles Market Rivalry on Innovation & Bayer’s Deal


On Feb 13, we issued an updated research report on premium agricultural chemicals firm Monsanto Company MON.

Over the last six months, shares of this Zacks Rank #3 (Hold) company have gained 2.8%, as against the 3.5% loss incurred by the industry.

Inside Story

Increase in per capita income levels across emerging economies (like Brazil) and significant rise in global population have been escalating demand for food products. These, in turn, have been boosting sales for crop-yield enhancing products offered by companies like Monsanto.

The company follows an innovation-based growth strategy, under which it introduces unique products and process technologies to help cultivators lower input costs and enhance crop yields. The company believes its new innovation investments as well as research and development deals will assist in driving top-line growth in the quarters ahead.

Monsanto is currently progressing on 20 new research and development projects. The company believes innovative farming solutions produced through these programs will help farmers battle severe agricultural constraints such as drought, water scarcity, climatic changes, land availability issues, plant diseases, incidence of weeds, and insects. Moreover, the company’s business subsidiary — The Climate Corporation — and the BioAg Alliance with Novozymes are also inventing state-of-the-art crop-yield enhancing solutions for cultivators.

In order to become the leading player in the global seeds, traits and agricultural chemical industry, Monsanto has joined forces withBayer AG BAYRY, through a $66-billion buyout offer. The company believes that Bayer’s association will open up a number of opportunities and growth for Monsanto’s business.

Monsanto believes when its Seeds and Traits and Climate FieldView platform will be combined with Bayer’s non-imitable crop protection trade, the competency of the former will go up in the hostile agricultural chemicals industry. Along with Bayer, Monsanto is aimed at propelling innovation for farmers around the world, develop advanced integrated optimized solutions for the cultivators and provide new offerings in the market which will be highly beneficial for farmers. Monsanto anticipates closing the transaction in early 2018, which is subject to customary closing conditions and awaits regulatory approvals. Bayer has also pledged to reimburse a high break-up fee of $2 billion to Monsanto, in case there is a deal blockage due to regulatory turmoils.

We notice that Monsanto reported robust first-quarter fiscal 2018 earnings. Quarterly bottom-line results came in 95% higher than the year-ago tally and also outpaced the Zacks Consensus Estimate by 7.9%. The company stated that this upside was primarily driven by healthy growth in South American business. Notably, the company anticipates to report stronger earnings in the upcoming quarters on the back of higher volume and pricing for INTACTA RR2 PRO soybeans in South America, gains secured from the Precision Planning business spin-off (closed on Sep 5, 2017) and increased glyphosate pricing.

However, over the last 30 days, the Zacks Consensus Estimate for the stock remained unchanged for both fiscal 2018 and 2019, reflecting neutral sentiments.

In order to boost competency in the market, Monsanto makes potential research and development investments. However, such expensive moves are currently adding up to its aggregate debt burden. We find that the company is highly leveraged with approximately $6.9 billion of long-term debt at the end of first-quarter fiscal 2018. Increased debt, if unchecked, will increase the company's financial obligations and impact its profitability in the near term.

In addition, commercial rivalry in the global seeds, traits and agricultural chemical industry has been significantly increasing. Intense competition exposes Monsanto to risks of market-share loss. This is because the successful launch of a product by any rival can substantially lower the market value of the existing products offered by the company. In order to lower the bargaining power of prospective end-users, Monsanto seeks to generate higher liquidity for research and development to fortify its product portfolio.

Also, Monsanto’s cost and sales are highly sensitive to commodity price fluctuations. Weak agricultural products’ prices might weigh over the company’s near-term revenues and margins. Given that incomes of farmers are directly related to agro-product prices, lower prices are reducing farmers’ income, and adversely affecting their seed and chemical product-purchasing decisions, thereby hurting Monsanto’s top and bottom lines. For instance, soft corn pricing in North America might dampen Monsanto’s revenues in the upcoming quarters of fiscal 2018.

Stocks to Consider

Two better-ranked stocks in the Zacks Categorized Basic Materials Sectorare listed below:

Air Products and Chemicals, Inc. APD holds a Zacks Rank #2 (Buy). The company has pulled off an average positive earnings surprise of 4.68% over the last four quarters.

Praxair, Inc. PX also carries a Zacks Rank #2. The company generated an average positive earnings surprise of 3% during the same time frame.

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