Monsanto Company Earnings: Would a Syngenta Buyout Boost Growth?

The agricultural giant has fired on all cylinders lately, but does it need to make a big deal to keep growing?

Jun 24, 2014 at 7:10AM

On Wednesday, Monsanto (NYSE:MON) will release its quarterly report, and shareholders have sent the stock soaring to its best levels since the agricultural boom right before the financial crisis hit. Yet even as Monsanto has done a good job of outpacing DuPont (NYSE:DD) and other rivals with its early move to focus on high-margin ag products, recent reports that the company considered buying Syngenta (NYSE:SYT) has some investors wondering if Monsanto thinks it needs to turn to the M&A front to bolster its future growth.

Monsanto is a company that draws strong opinions from both proponents and opponents of the company. Investors have unquestionably benefited from the huge growth that the fertilizer and seed-maker has seen during the farming boom, as strong crop prices have encouraged farmers to use crop-yield-enhancing techniques to take full advantage of high demand. Yet critics argue that Monsanto's emphasis on genetically modified organisms threatens the food supply and the trading position of U.S. growers in relation to reluctant partners overseas. Let's take an early look at what's been happening with Monsanto over the past quarter and what we're likely to see in its report.

Mon Own Image
Source: Monsanto.

Stats on Monsanto

Analyst EPS Estimate

$1.56

Change From Year-Ago EPS

(6%)

Revenue Estimate

$4.41 billion

Change From Year-Ago Revenue

3.7%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Have Monsanto earnings seen their best days?
Investors have slashed their views on Monsanto earnings in recent months, cutting May-quarter estimates by 13%. Yet they don't see major problems further into the future, and the stock has responded favorably, rising more than 7% since mid-March.

Monsanto's fiscal second-quarter report in early April showed just how important the company's focus on seeds and genomic products has been to its overall growth. Even though a cold winter led to delays in shipments of products, Monsanto's net sales rose almost 7% from year-earlier figures. In particular, seeds sales in the soybean arena have risen substantially, offsetting weakness in corn planting. Margins improved, and Monsanto's products have demonstrated advantages over previous products, which could lead to further growth. Overall, the strong results from seeds has been a big part of why DuPont, Syngenta, and other players in the chemicals industry have moved so aggressively toward the agricultural side of the business.

Crops Ben Collins Flickr

Source: Ben Collins/Flickr.

Another way that Monsanto has profited from its expertise is through licensing payments from rivals. DuPont and Monsanto agreed to a licensing agreement that has greatly enhanced Monsanto's cash flow. As long as Monsanto's research and development keeps it ahead of its peers, then similar deals could add a substantial amount of incremental revenue to its direct sales of products to agricultural professionals.

Still, Monsanto faces huge opposition overseas. In particular, the Russian government has been quite vocal lately in its disdain for Monsanto, with Russian officials comparing the company to a terrorist organization and seeking to pass laws imposing criminal fines on the producers of biotech-aided crops. Of course, DuPont, Syngenta, and others also make genetically modified seeds and therefore would face the same issues, but Monsanto has come to be the face of the anti-GMO movement.

In that context, speculation about a possible Monsanto buyout of Syngenta has been interesting. Syngenta is a Swiss company, which would potentially allow Monsanto to move its tax domicile outside the U.S. and therefore escape high corporate taxation. Yet there might be other potential benefits to consolidation in the industry, including economies of scale and synergies related to production and transportation. Yet the deal would be huge, with Syngenta having a market cap of more than half of Monsanto's, and financing a buyout might be difficult even with low interest rates prevailing.

In the Monsanto earnings report, watch to see if the company comments on the Syngenta buyout reports. Given the premiums that companies have had to pay to make overseas acquisitions lately, shareholders might want to root against a Syngenta-Monsanto merger, at least in the short run.

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