On Jan 15, 2014, we retained our Neutral recommendation on Monsanto Company (MON - Analyst Report). While we see bright prospects for the company based on its inorganic growth, we cannot overlook the huge research and development (R&D) expenditure Monsanto has to undertake.
Why the Retention?
Monsanto is a leading provider of agricultural chemicals, and operates in two segments, Seeds and Genomics and Agricultural Productivity. The company has been successfully attempting to gain a greater market share, through acquisitions and product launches.
With the growing population, the need for farmers to produce more from the available resources has become prominent. In these cases, farmers tend to use productive chemicals to increase the yield. Additionally, Monsanto has strong cash and cash equivalents balance, which it intends to utilize for share buybacks, thereby increasing shareholders’ value.
However, the considerable time spent and massive expenses incurred due to R&D activities make the products high priced, thereby exposing the company to major price competition from local generic companies. Monsanto’s overseas operations expose it to foreign currency fluctuation risks. Further, the foreign operational hazards including changes in local, political or economic conditions; governmental policies and pricing directives; as well as import and trade restrictions in foreign nations add to the peril.
A glimpse of the fiscal first-quarter 2014 results clearly depicts favorable company performance in the quarter. Monsanto’s earnings per share were 67 cents in the quarter, up from the Zacks Consensus Estimate of 63 cents. Revenues were up 7% year over year to $3,143.0 million, largely as a result of growth in the Agricultural Productivity segment. In the quarter, gross margin expanded 200 basis points year over year to 50%.
The Zacks Consensus Estimate for Monsanto currently stands at $5.25 per share for fiscal 2014 and $6.05 for fiscal 2015, reflecting year-over-year growth of 15.2% and 15.1%, respectively.
Other Stocks to Consider
With a Zacks Rank #3 (Hold), Monsanto currently has a market capitalization of $59.4 billion. Some better-ranked stocks in the industry include Gruma S.A.B. de CV , Sensient Technologies Corporation (SXT - Snapshot Report) and Quaker Chemical Corporation (KWR - Snapshot Report). While Gruma carries a Zacks Rank #1 (Strong Buy), Sensient Technologies and Quaker Chemical Corp. hold a Zacks Rank #2 (Buy).