The Case For Monsanto At $120

• The share price of Monsanto Company MON has declined close to 20 percent, year to date.
• Vincent Andrews of Morgan Stanley reinitiated coverage of Monsanto with an Overweight rating and price target of $120.
• Andrews believes that the stock is overly discounting for a difficult operating environment and the failure of the Syngenta AG (ADR) SYT deal.

Andrews expects “relative outperformance as the market reconnects with MON's defensive nature, though strategic questions regarding Syngenta could linger.” The current stock valuation implies an EPS outcome that is about 10 percent worse than estimated or further multiple contraction below 10x EBITDA.

According to the Morgan Stanley report, “In the current macro/equity market environment we believe that Monsanto should behave in a more defensive posture versus the broader agriculture sub-segment of Chemicals, not to mention Chemicals overall.”

The company sells minimally in China, is not directly affected by crude oil prices, sells products that are focused on farmers, has a high quality franchise model and an underleveraged balance sheet. Andrews believes that now that Monsanto has walked away from Syngenta, it could be time for the former company to outperform.

However, Andrews also mentioned that the overall operating environment for agriculture continued to “become more challenging due to continued strong grain production weighing on soft commodity prices, farmer economics, and planted acreage of high margin corn and soybeans.”

In addition, Fx has continued to be a headwind, with both the Euro and the Brazilian Real adversely impacting the numbers. Also, Andrews expects glyphosate to pose significant challenges in FY2016, with Monsanto including a $0.45 licensing benefit in its FY2015 EPS and the price of Chinese generic glyphosate continuing to decline.

The company is expected to take on an accelerated $4 billion share buyback initiatives in the near term, in lieu of the Syngenta deal. Andrews also expects the company to able to achieve the high end of its $300-$500 million opex reduction target by the end of FY2017.

The Morgan Stanley report added that Fx was unlikely to get meaningfully worse going forward.