We upgrade our recommendation on Monsanto Company (MON) from Underperform to Neutral based on our optimism on the higher production of SmartStax corn seeds.
SmartStax, which is planted on 3 million acres out of a total of 32 million acres, is expected to cover 15 million acres in fiscal 2011 and additional 9 million acres in fiscal 2012. This increased production will significantly improve top-line results as corn seeds and traits contributed 45% of the total revenue in the nine months ended May 31, 2010. Monsanto is also expected to experience a higher profit margin based on economies of scale.
Monsanto has been continuously increasing production and focusing on innovation and upgrading of technology to make farmers more productive. The company’s robust pipeline of new products appears encouraging.
Recently, Monsanto introduced a new product called Warrant Herbicide. It is an encapsulated formulation of acetochlor designed for cotton and soybean. The new product was tested by farmers as MON 63410 Herbicide and has been proved successful. Warrant Herbicide helps prevent pigweed on cotton and is effective for more than a month.
Monsanto’s capabilities in biotechnology and breeding research are generating a rich product pipeline, which is expected to drive long-term growth.
Monsanto also declared an increase in its quarterly dividend from $0.27 per share to $0.28 per share, payable on October 29 with the record date of October 8.
We bank on the company’s market leadership and are optimistic on its near-to-mid-term performance. However, an intensely competitive environment and Monsanto’s huge dependence on a few large customers are discouraging. Monsanto also faces foreign currency risk since a significant portion of its income comes from outside the U.S.
For the fourth quarter and fiscal 2010, management expects EPS in the range of $(0.09)-$0.11 and $2.40-$2.60, respectively, representing a decrease from fiscal 2009. However, over the longer-term we expect a considerable improvement in earnings based on higher production.