We maintain our Outperform recommendation on global agribusiness giant, Monsanto Company (MON - Analyst Report) .
Monsanto has witnessed an encouraging upside in revenue growth at the inaugurating quarter of fiscal 2012, driven by volume expansion and a mix benefit from significant corn trait expansion in Brazil and Argentina. Besides, benefits from the Australian cotton business were an added bonus. We believe that such business improvement will capture further growth opportunities in the coming quarters.
The company’s continued focus on innovation and up gradation of technology, in collaboration with agri-business research firms have led to higher yields for farmers; reducing the use of key resources. The R&D lineups in molecular-bred hybrid technologies, which are expected to ensure volume growth and trait upgrades worldwide, looks impressive. This, we believe willsupport sustainability of agricultural systems and bring modernization in cropping pattern for a longer period of time.
The company’s improved product line has given it a competitive edge over time and the growers have recognized the value and benefits of the product yield. However, the availability and cost of seeds depend primarily on seed yields, weather conditions, farmer contract terms, commodity prices, and global supply and demand; which may fluctuate. To minimize weather risks, Monsanto produces seeds at multiple locations under irrigated conditions. Furthermore, the company uses future contracts and other hedging mechanisms to manage commodity price fluctuations. Besides, Monsanto also entered into contracts with third parties on favorable terms for uninterrupted supply of seeds.
Risks amplify as Monsanto’s worldwide business gets exposed to foreign operational hazards and currency fluctuations. Changes in local political or economic conditions; governmental policies and pricing directives; and import and trade restrictions in foreign nation remain causes of concern. Besides, third party risks remain unavoidable too.
Moreover, breakneck competition over time, from numerous agrichemical, seed marketers and local generic companies has been forcing the company to generate high yielding varieties. This has been raising cost of production and huge investments in research and developmental activity, since long. Over and above such capital outlays, increased societal/government resistance to genetically modified crops and poor acceptance of new products are still being bugging as the major offsetting factors for the company.
However, the company’s upside full-year 2012 EPSguidance appears encouraging. The anticipation of a strong US order book alongside a pipeline of advanced R&D compliments our view. The company’s commitment toward returning value to shareholders through dividend payment is not only commendable but also encouraging.
We believe Monsanto’s continued product development, consolidation of business segments as well as cost optimizations are expected to fetch favorable results for the coming quarters.
Missouri-based Monsanto Company, together with its subsidiaries, is a leading global provider of agricultural products for farmers in the United States and internationally. Monsanto's biotechnology research and rich product pipeline provide strong competition to its peers, such as The Dow Chemical Company (DOW - Analyst Report) , Syngenta AG (SYT - Analyst Report) , The Scotts Miracle-Gro Co (SMG - Snapshot Report) , and BASF (BASFY.PK).
Monsanto has a Zacks #2 Rank, which translates into a short-term Buy rating (1-3 months).