We upgraded our recommendation on Monsanto Company (MON) from Underperform to Neutral based on improved visibility on the yield performance of SmartStax corn seed and RR2Y (Roundup Ready 2 Yield) soybean seed in the coming years.
SmartStax and RR2Y posted a decent yield on completion of 95% harvest in fiscal 2010, which enhances our long-term perspective on the stock. With its plan to increase the production of its SmartStax corn seeds and RR2Y soybean seeds, Monsanto started plantation with an intention to cover additional acres of land. Monsanto has been continuously increasing its production and focusing on innovation and upgrading of technology to make farmers more productive.
We increased our fiscal 2012 EPS estimate by 2 cents and are confident of the company’s market leadership and optimistic on its long-term performance. Monsanto’s capabilities in biotechnology and breeding research are generating a rich product pipeline, which is expected to drive long-term growth.
Monsanto also aims at growth through acquisitions. The company acquired Aly Participacoes Ltda. and the assets of WestBred, LLC in 2009. In 2010, Monsanto acquired Chesterfield Village research center from Pfizer Inc. (PFE) for $435 million and a 19.9% stake in InterGrain Pty Ltd, an Australian cereal breeder.
Although the agricultural productivity segment has encountered significant market changes last year, the company’s pipeline of agricultural biotechnology products stands unmatched in the industry. Further, Monsanto announced its intention to increase the production capacity of glyphosate, a major product of that segment, which is expected to boost net revenue in the coming years.
On the flip side, we are concerned about the decrease in the prices of Roundup herbicides, which forced fiscal 2010 EPS to plummet to $2.41, almost half of $4.41 in fiscal 2009. Further, a slower market recovery and an intensely competitive environment pose additional challenges for the company. Monsanto competes head-to-head with Syngenta AG (SYT).
The stock at present retains its Zacks #2 Rank (short term “Buy” rating).