Friday, April 03, 2009

Monsanto (NYSE:MON): Downgrade to Neutral at JP Morgan

JP Morgan is out downgrading Monsanto (NYSE:MON) to Neutral from Overweight while lowering tgt to $82 from $100.

According to the firm, EPS issues for Monsanto more concern F2010 than F2009. CEO Hugh Grant emphasized the F2009 glyphosate peak on the conference call and the uncertainties in the rate of gross profit decrease ($0.60 per share) from his $2.4 billion F2009 forecast to the $1.9 billion projection he envisions for 2012. That, in a word, is the primary difficulty in forecasting EPS over a multi-year period for Monsanto. Should the decline occur at once, Monsanto is likely to have a flattish EPS year. Should it happen more gradually, the effects mean less.

A second issue is that Monsanto probably needs to raise corn seed and trait prices 5%-10% in F2010 after a year of roughly 20% increases in F2009. Given the possible magnitudes of the glyphosate decreases there is little choice in order for EPS to have a reasonable chance at growing at a double-digit rate for F2010. Given that price announcements in corn traits and seeds are probably not forthcoming until August-September, and the rate of glyphosate profit decrease is an open question, investors will probably have difficulty in valuing Monsanto over the coming months.

Monsanto’s F2010 EPS growth rate is likely to decelerate in F2010. F2009 EPS is being assisted by a roughly $0.50 per share tailwind in glyphosate. A ($0.30) headwind might be a reasonable base case for F2010. F2009 was an exceptional year for price increases in corn seeds and traits and they expect gross profit to climb 23% or about $0.70 per share; something like 60% of this increase or $0.40 seems more reasonable for F2010 at this juncture. JP Morgan does however expect soybean seeds and traits to have a strong F2010 as Ready to Yield soybeans ramps up to about 10 million acres and benefits the income statement by about $0.35 per share.

Notablecalls: Struggling to decide if this is a significant call or not. The agri chem. analyst team at JPM is pretty well regarded but on the other hand it's kind of difficult to envision Monsanto's growth coming to a halt.

If JPM's right (or if investors think they are right), MON's headed lower. Way lower.

PS: I'm hearing MSCO is out lowering MON tgt to $115 from $170 this AM.

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