Biotech Values

[DewDiligence]

A Buying Opportunity in Monsanto?

[This is a Morgan Joseph sell-side report that was published two days ago, before today’s news of MON’s market-share gain in South America (#msg-50376492). Coincidence? I dunno.]

http://online.barrons.com/article/SB127411888546192985.html

›By Morgan Joseph ($54.61, May 17, 2010)
Analyst: Charles E. Mitchell Rentschler

Contrary to a lot of the press the company has been receiving, we believe that Monsanto (ticker: MON) is making some solid progress, and see weakness as a buying opportunity, although we are lowering our target price to $65 from $90.

While in the U.S. the company may have lost a point or two in share of soybean seeds this year, Monsanto has maintained its position year-over-year in corn seeds at 36%.

We think that American farmers value Monsanto's technology, and that most are giving the company the opportunity to get its prices right. Then, too, bear in mind that a large part of seed-selling hinges on the personal relationship between the farmer and the Monsanto salesman that typically can offer very helpful horticultural advice. Indicating that farmers aren't backing away from it, Monsanto got growers last year to plant three million acres of its new eight-traited SmartStax corn seed and to raise six million acres of its new Roundup Ready 2 Yield soybean seeds, largest ever, respectively, for new-product launches of corn and bean seeds.[Still, these acreages were ~25% below MON’s original expectations, stemming in part from MON’s overpricing.] It expects the acreage for these new products to reach 15 million to 17 million in 2011.

Meanwhile, the company is frontally dealing with the reality of reinvigorated competition from China in its glyphosate [Roundup] business. Monsanto is downsizing this business to generate annual-gross profits of about $600 million, or on a par with fiscal 2006 levels, roughly one-third of the returns it enjoyed in fiscal 2008 and 2009, when it took far too much advantage of its Asian counterparts' missteps, in our opinion.

Monsanto estimates it can grow its earnings at a 15% annual clip, for the time being [the actual guidance is 13-17%]. While Monsanto's next "blockbuster" product launches are a couple of years out, demand in the meantime for its corn and soybean seeds should remain very strong, we predict.

Ethanol is a huge customer, of course, for U.S, maize [however, an offsetting trend is the HFCS-free junk food has become a fad], and exports of beans and corn from the Americas, particularly to Asia, continue to grow. China, in fact, is just starting to import corn, albeit tentatively. [MON does not currently derive material revenue from China, but that could change.]

We would note, too, that U.S. farmers appear to be raising the intensity of corn-seed/acre by 2%-3% per year [i.e. the individual plants are being positioned closer together thanks to equipment from such companies as DE that uses GPS and other high-tech features]. Monsanto's new-product pipeline, though, should start bubbling again in earnest in fiscal 2012 [especially if SmartStax Refuge-in-a-Bag corn is approved in time for a 2012 US launch—see below].

The company, by then, should have EPA-approval for its 5% "refuge-in-a-bag" product [#msg-48335964]. The "refuge," or non-insect-protected seeds randomly included in each sack of SmartStax so that the farmer does not have to sew them separately, and time-consumingly [LOL—is this a word?] Farmers that we know speak highly of this concept [no kidding].

About then [i.e. 2012], we expect Monsanto to introduce its Vistive Gold soybeans that offer a sustainable, land-based source of omega-3 fatty acid as found in, and every bit as beneficial for people as, fish oil [#msg-50378314]. While becoming the very first genetically-modified seed-product designed for consumption by people, Vistive Gold oil would be a processed product -- i.e., not directly consumed by humans. We can envision enormous demand for this product.

Excitingly, moreover, in a couple of years Monsanto expects to market its very first soybean seed with two genes (its current Roundup Ready 2 Yield consists of a single gene making it tolerant of glyphosate and a yield "benefit," or booster). The new offering, dubbed, Insect-protected + Roundup Ready 2 Yield, will possess a second, insect-resistant gene and make its debut in Brazil [this product would be “overdesigned” for the US], where, because of the humid climate, insects are a huge problem and where the company believes it can quickly populate 50 million acres. We figure, also, that the company will have begun selling SmartStax corn seed in South America.

While we would expect product introductions like these to accelerate Monsanto's growth, we think the mid-part of this decade should see the launch of products that are probably even more spectacular: corn that's drought resistant [#msg-41324910], corn that needs a lot less nitrogen than typical / thrives on more nitrogen than typical, and soybeans tolerant of dicamba herbicide (in addition to glyphosate).

We are really excited, also, about the prospects for Monsanto's vegetable seeds. Revenue of this business, which has gross margins just over 60%, soon will exceed $1 billion a year, all accomplished by breeding, none stemming from genetic-modification.

It is impossible for us to dollarize the increment to gross profit from each and all of the above, but we believe collectively they will provide Monsanto with the ability to start growing rapidly again, well above the 15% annual rate it is projecting for the time being.

In short, we see a lot to like in Monsanto shares and would recommend investors buy them on weakness caused either by specific adverse publicity [there’s certainly no shortage of that—see #msg-48939741] or by general market conditions.‹