Atlantic Equities Upgrades Monsanto After 'Long-Standing' Underweight Rating

In a report published Monday, Atlantic Equities analyst Colin Isaac upgraded the rating on

from Underweight to Neutral, while raising the price target to $120. Despite the continued disappointing organic growth, a potential deal with

(ADR)

could bring in strategic and financial benefits for Monsanto, which could significantly alter its risk/growth profile. In addition, the analyst believes that Ag fundamentals are unlikely to see further deterioration. However, given that organic growth in the company's core Seeds business is meaningfully below the level required to "meet management's target of doubling EPS 2014-2019. With low-single-digit growth in 2015E, 2016-2019 now requires a growth rate significantly above the historic trend to achieve this goal," Isaac stated. An additional headwind for Monsanto comes in the form of the 35 percent, year-on-year, decline in Chinese glyphosate prices. Despite the management proactively seeking alternative means of growth, the analyst believes that the company's targets for 2019 would increasingly be at risk. "Renewed interest in Syngenta is perhaps a tacit admission that the GMO seed industry has matured. Nevertheless the combination would create a formidable leader in both chemical/biotech solutions for crop protection and is a major step forward in establishing an industry-leading Precision Ag platform," the Atlantic Equities report said. In the event of a merger, Monsanto could stand to gain synergies worth $1.5 billion by consolidating R&D and SG&A. On the other hand, divestment of the Seeds, Lawn & Garden and non-selective herbicides businesses could help raise $10 billion for Monsanto. According to Isaac, "Monsanto has already indicated it would sell Syngenta's entire Seeds business to appease regulators." The analyst believes that the stock would be positively impacted if a deal with Syngenta were to materialize.