We are downgrading our recommendation on Monsanto Company (MON) from Neutral to Underperform based on the weak results that the company posted for fiscal 2010 with an EPS of $2.41, almost halved from $4.41 in fiscal 2009.
The increases in cost were the icing on the cake. We believe this will continue for a substantial period of time based on the slower market recovery. Further, an intensely competitive environment and Monsanto’s huge dependence on a few large customers can lead to risk.
Monsanto also faces foreign currency risk since a significant portion of its income comes from outside the U.S. Thus, we downgraded our recommendation on the stock from Neutral to Underperform, which indicates that it would perform below the broader market. Our $52.00 target price, 18.5x 2011 EPS, reflects this view.