On Thursday, analysts at JPMorgan Chase upgraded Monsanto (NYSE:MON) from Neutral to Overweight, setting a price target of $125 on the stock. Shares closed the day up 2.3 percent at about $117 on the news but have since fallen back to below $113, down about 2.6 percent year to date, at the time of writing.
The upgrade was predicated on an argument by analyst Jeffrey Zekauskas, who, according to the Financial Post, told clients that “Activist investors tend to invest where there is room for value creation by changing management for the better, or by splitting a company into parts or through increasing balance sheet leverage in service of share repurchase. Monsanto meets two of these criteria.” Specifically, Zekauskas believes that Monsanto created value by splitting itself into more nimble and focused units, and by repurchasing shares.
The split would be down the line between Monsanto’s seeds-and-science business and its products business, which is perhaps best represented by Roundup (aka glyphosate, the most widely used herbicide in the United States). At the beginning of April, Monsanto’s “Agricultural Productivity” segment, in which Roundup resides, posted second-quarter net sales of $1.18 billion, an increase of 5.1 percent on the year; gross profit of $454 million, up 22.4 percent on the year; and EBIT of $308 million, up 20 percent on the year.
Earlier in the year, analysts at Credit Suisse highlighted the stock in its 2014 conviction stock call list. The firm argues that Monsanto has a “best-in-class” base seed portfolio as well as a healthy research and development pipeline, which should allow it to grow its market share across the Americas.
Analyst Chris Parkinson estimates earnings of $5.31 per share in fiscal 2014, slightly more bullish than the current mean analyst estimate and representing potential growth of about 15.4 percent. Parkinson’s price target is $134, “based on 21x our FY16 normalized EPS estimate of $7.40, discounted back (implies an average annual total of ~17.5 percent EPS growth.)” This represents potential upside of nearly 19 percent at the time of writing.
Despite dubious performance on the stock chart recently, Monsanto looks promising relative to competitors like DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW). For better or worse, Monsanto has found itself with one of the most popular soybeans in the country, and it is rolling out Roundup Ready 2 Yield. Monsanto stakes a claim to as much as 90 percent of the soybean yield in the U.S., as well as 85 percent of the Brazilian market.
Moreover, DuPont will begin selling Roundup Ready 2 Yield soybeans and Roundup Ready 2 Xtend this year, paying a royalty of about $200 million each year through 2018 to Monsanto for the right. After 2018, that royalty will surge to $950 million annually.
Dow Chemical is working on a competing soybean called Enlist E3, which is also glyphosate resistant. Like Monsanto, Dow Chemical is engaged in the perpetual game of herbicide-resistance leapfrog that has attracted consumer ire against both companies. This criticism has done little, however, to upset Monsanto’s leading position in the agricultural business.
That Monsanto is often vilified by healthy food and sustainable farming advocates is no secret. According to the Financial Times, CEO Hugh Grant has contended with the issue firsthand, recently speaking about brand and the philosophical and moral schism over the use of GMOs and gene patenting at a conference in London hosted by The Economist.
Vehement opposition has fueled political debate on the issue, which right now is tied up in the U.S. Food and Drug Administration’s Food Safety Modernization Act (FSMA). The law expands the authority of the agency as a agricultural regulator, and its implementation has been a boon for Monsanto, whose biotechnology is used to satisfy the “preventative” ambition of food safety administrators.