Friday, May 14, 2010

Monsanto (NYSE:MON): Trading Darwin Award of the month goes to Morgan Stanley

Morgan Stanley's agricultural products analysts Vincent Andrews and Megan Davis are making a call on Monsanto (NYSE:MON) that I think deserves at least Trading Darwin Award of the month. After quarters & quarters of being positive on the name, the firm is finally getting off their Street high target of $95/sh and are lowering it to a more conservative $70.

They have also published a Negative trading call (RTI) articulating their belief that Monsanto’s shares are likely to decline in the near-term if they are correct about Roundup gross profit.

And get this - Morgan Stanley is keeping MON Overweight-rated.

Roundup likely to disappoint relative to guidance. At F2Q10 reporting, Monsanto lowered its Roundup chemical F2010 gross profit guidance from a range of $650 to $750 million to plus/minus $600 million. MSCO is lowering their Roundup gross profit estimate from $575 million to $500 to reflect both lower volume and pricing. While Monsanto has guided to at least 250 million gallons of combined branded and generic volume in F2010, they believe that volume could come in below that with the bulk of the lost volume coming out of the branded segment. They expect this lost volume to come from a confluence of:

1. The very early planting progress in US corn destroyed some product demand;

2. There is still too much generic product in the channel and that is partially a function of point #1 as the demand that was destroyed was generic product demand (i.e., less “burn down”);

3. As in fertilizer, MSCO believes that both dealers and farmers are looking to exit the spring season with as little inventory on hand as possible.

Additionally, the firm expects pricing to be pressured by both the above and Monsanto's branded competitors bundling their branded glyphosate at attractive price points with their other more proprietary crop chemicals.

Summary & Conclusions
While the firm remains bullish in the long term about Monsanto the company’s prospects, they believe that Monsanto the stock is increasingly dislocated from Monsanto the company’s prospects. They believe that continued strategic and earnings’ disappointments have forced Monsanto the stock to remain narrowly focused on the current continuously disappointing “state of play” rather than focusing on the more forward looking opportunity set provided by a best in class technology pipeline. Until Monsanto is able to prove out the value proposition of its newest technology (SmartStax in corn and Roundup Ready 2 Yield in soybeans), they believe that investors will not be inclined to credit Monsanto the stock for the potential earnings power of the $1.70 per share of R&D expensed annually.

Where is valuation today? Monsanto currently trades at 16.1-times MSCO F2011 EPS estimate of $3.45. They believe that this breaks down to approximately 8-times ~$0.15 of chemical EPS and 16.5-times seeds and traits EPS of ~$3.30. Historically, they believe that the seeds and traits business has traded between 20 and 45-times seeds and traits EPS (assuming the chemical business at 8-times.

How low can the stock go? MSCO Bear Case valuation of $45 per share assumes that all of the above goes wrong. In that case, they believe that Monsanto’s chemical business could trade at 8-time EPS and that the multiple on the seeds and traits business could contract as low as the ~14-times market multiple (likely conservative given Monsanto’s substantial R&D spend and net cash balance sheet). In this scenario, they would expect the stock’s valuation to look no further than NTM EPS which they believe would be $3.34 in this scenario.

Notablecalls: So, let's see - the stock peaked around $85/share back in January. Back then the Andrews & Davis duo yapped about how the OTHER analysts were cautious-negative (less than 50% Overweight vs. > 85% in 2008) on the name but they saw 'business and investor momentum' turning. So they reiterated their Overweight rating and $105 target on the name.

And today after a 30 pt. slide, with the stock at $55 they are issuing a negative Research Tactical Idea (RTI) ahead of June 24 results. After all, their Bear Case scenario (if all goes wrong) foresees a $45/share target.

But they are keeping the stock Overweight-rated, which means they don't see everything going wrong? Right?


Boy, I would like to overhear a phone conversation today where the Andrews & Davis duo explain to their institutional client(s) that are way under water the logic of keeping Monsanto OW-rated (a.k.a Long) while at the same time telling the fast money accounts to short the name.

I believe all this is symptomatic of a much wider issue. The research coming out of these Tier-1 firms very often lacks the quality one would expect from Tier-1 cabal. Sure, they still have the large client bases and are therefore able to create some directional pressure but it surely ain't the good ole days.

Maybe it's because their coverage lists have gotten so long that the analyst teams just don't have enough time to devote to each single name?

Notice lately how little credibility Goldman Sachs' equity research has in the market? Most of their ratings get faded aggressively.

The game has changed - small, more specialized shops is where the hedge-fund desks are turning to in order to gain an edge. Shops that cover single sectors or even sub-sectors. That's where the best research comes these days, in my opinon.

Back to Monsanto (MON), I have no clue how this MSCO call will work out. But I do think MSCO has lost their Street cred. in the name.

Sorry, had to get it off my chest.


securityfocus said...

+1 for your analysis

Adam said...

make that +2, well done sir!