We have downgraded our recommendation on Monsanto Company (MON) to Neutral from Outperform based on our concerns over mounting production cost and increasing business competition. Our concerns, however, neutralize as the company has been witnessing continuous increase in production and it is focused on innovation and technology upgradation.
The global market for Seeds and Genomics is cluttered with numerous agrichemical and seed marketers. To survive amidst tough market conditions, Monsanto’s yield upgradation technique calls for a huge research and development (R&D) expense, thus hurting margins.
Besides, the time and expenses involved in the R&D process involve rise in product prices. This, in turn, exposes the company to the risk of shift in customer loyalty toward local generics at lower prices. Adding up to the peril, the foreign operational hazards and currency fluctuations continue to curb the company’s profitability.
Also, instances of societal resistance to genetically modified crops and poor acceptance of new products by farmers raise anxiety.
However, hope survives as we witness continuous increase in production led by technology upgradation. The company’s collaboration with agri-business research firms and molecular-bred hybrid technologies has already proved effective.
The fact that the company keeps itself well guarded against weather and commodity price fluctuations via irrigated farming practices and future hedging deserves a mention. These help minimize risks associated with procurement uncertainty and unexpected price rise.
Over time, the growers have witnessed an upside in volumes and a mix benefit from Monsanto seeds. Monsanto seeds successfully increased yields, while reducing the use of key resources– a competitive edge above the other industry players including Syngenta AG (SYT) and BASF SE (BASFY).
However, Monsanto carries a Zacks # 1 Rank, which translates into a short-term ‘Strong Buy’ rating (1-3 months).
BASF SE (BASFY): Free Stock Analysis Report
MONSANTO CO-NEW (MON): Free Stock Analysis Report
SYNGENTA AG-ADR (SYT): Free Stock Analysis Report
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