On Jan 16, 2015, we issued an updated research report on premium agro-chemical firm Monsanto Company (MON). The company, along with its subsidiaries, is a leading global provider of agricultural products. Despite several scopes for improvement, Monsanto is currently facing certain major headwinds in business.
Scopes for Improvement
In the first quarter of fiscal 2015, Monsanto’s adjusted earnings surpassed the Zacks Consensus Estimate by 38.2% and it aims to double its current earnings by 2019. Following an innovation-based growth strategy, the company aims to lower input costs and increase crop yields with new product and process technologies.
Moreover, the recent drop in oil prices has generated positive externalities for numerous agricultural stocks. Lower oil prices are expected to reduce the expenses of agricultural product marketing and eventually, lower the market prices of food items. Under such circumstances, agricultural companies such as Monsanto would experience greater demand for its products and hence, generate higher revenues and earnings in the upcoming quarters.
Monsanto intends to capitalize on the growing demand for corn and soy over the next five years. The company’s core businesses are expected to contribute more than $4 billion to its gross profit by fiscal 2019. Prominent economies such as Brazil, U.S., Europe and Argentina are projected to become prospective trading hubs of the company.
Bearish Outcomes
Higher costs and expenses can be detrimental to Monsanto’s profitability. For fiscal 2015, investments in new platforms and higher debt levels will increase operating expenses and interest costs of the company.
In addition, the company’s international operations expose it to foreign currency fluctuation risks. Also, foreign operational hazards, including changes in local, political or economic conditions, governmental policies and pricing directives, as well as import and trade restrictions in foreign economies, will add to the peril.
In addition, the global market for Seeds and Genomics is cluttered with numerous agrochemical and seed marketers. As a result, Monsanto faces stiff competition in this segment, particularly from row crops and vegetable seeds. Such breakneck competition has been forcing the company to come up with high-yielding varieties over time. Moreover, the company’s third-party dependence for seed supply may cause operational uncertainties.
With a market capitalization of $56.92 billion, Monsanto carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Wilmar International Ltd. (WLMIY), Alcoa Inc. (AA) and Air Products & Chemicals Inc. (APD). While Wilmar International sports a Zacks Rank #1 (Strong Buy), both Alcoa Inc. and Air Products & Chemicals Inc. hold a Zacks Rank #2 (Buy).
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