Monsanto Moves Off Large M&A: Is The Stock Still A Buy?

Monsanto Company MON announced its FQ2 earnings and 2016 guidance in line with the shortfall preannounced in March.

Deutsche Bank’s David Begleiter maintained a Buy rating on the company, while lowering the price target from $105 to $100.

Begleiter mentioned that management has “pivoted away from large scale M&A in crop protection chemicals. Instead Monsanto will pursue a strategy focused on licensing, partnerships, collaborations and smaller scale M&A to create a crop chemical platform to integrate with its digital ag platform.”

With the risk associated with a $35 billion acquisition having been eliminated, the company is likely to be able to see EPS growth of 15 percent in 2017.

FQ2 Results & Guidance

Monsanto reported its FQ2 EPS at $2.42, in line with the preannouncement and down 17 percent year-on-year.

In the Seeds business, Corn gross profit declined 8 percent due to FX headwinds, higher U.S. price discounting and increased COGS, while Soybean gross profit fell 12 percent.

Ag Productivity saw a 52 percent decline in gross profit, driven by lower glyphosate volumes.

Monsanto reiterated its “recently lowered” 2016 guidance, representing an 11-23 percent decline, while guiding to midteens EPS growth for 2017-2019.

2017 Outlook

Begleiter expects growth in 2017 to be driven by robust soybean acreage ramp for Intacta in Brazil and Xtend in the U.S., significantly lower Xtend launch costs, lower corn COGS, incremental cost savings of $200 million, lower Other Expenses and “corn germplasm price/mix uplift.”

The EPS estimates for 2016, 2017 and 2018 have been lowered.