Few companies can elicit visceral reactions the way Monsanto (NYSE: MON) does, generating massive protests for genetically modifying crop seeds to withstand the ravages of its leading herbicide Roundup. Just last week there was an international day of protest against the agri-giant, and few companies rank lower in public opinion surveys on corporate reputations than does the seed and chemical company.
Yet Monsanto remains highly successful and very profitable. Revenue has jumped 50% since 2010, reaching more than $15.8 billion in 2014, while net income surged almost 150% to $2.7 billion.
But as it builds on that success to expand into new areas such as big data crop planting technology and insurance, and angles to buy Swiss rival Syngenta (NYSE: SYT), can Monsanto still be a buy in the face of all the negativity?
Dodging the tax bullet
Syngenta rejected Monsanto's first buyout overture, saying the $45 billion offer "fundamentally undervalues" its growth potential, but it's girding for a second bid that could be a more palatable $50 billion or so.
While obvious synergies could be realized by the union of the two chemical companies -- Monsanto has said it would sell Syngenta's seed business to clear antitrust hurdles -- one primary real motivation behind the move might be to allow Monsanto to escape the heavy burden imposed by the U.S. corporate tax code.
Called an inversion, buying its foreign rival would allow Monsanto to become a Swiss corporation and reduce its tax rate. Last year it paid $648 million in U.S. federal income taxes on continuing pre-tax income of $2.4 billion, for an effective tax rate of almost 27% (the total tax bill, including state and foreign taxes, was $3.8 billion). In contrast, Syngenta reported an effective tax rate of just 14%.
The U.S. Treasury Department clamped down on inversions following a spate of such transactions, making this move more difficult but not impossible for Monsanto. The offer, though, has also attracted the attention of rivals such as BASF, Dow Chemical, and DuPont, which might now also make bids.
A seed of doubt
Monsanto controls a third of the world seed market, and together with Syngenta would increase its global share to over 40%. Since Monsanto is willing to shed Syngenta's entire seed portfolio, it becomes clear that another key, strategic reason behind the takeover offer is neutralizing one of the threats to its glyphosate-based herbicide business.
Roundup is the world's leading weed killer and accounts for about a third of Monsanto's annual revenue. Yet when you add in the contribution it makes to other segments, such as its Roundup Ready GMO seeds that allows plants to grow even after being sprayed with the deadly herbicide, you realize almost every aspect of Monsanto's business is connected to the brand.
Yet farmers' heavy application of the herbicide has created superweeds that are resistant to it, which is leading to an arms race of sorts and its competitors are targeting the lucrative field.
The U.S. Agriculture Department recently approved seeds that are resistant to Dow Chemical's 2,4-D herbicide, and $11.4 billion, or 75%, of Syngenta's $15.1 billion in total revenue last year came from herbicides, fungicides, and insecticides. Bringing Syngenta's portfolio into its own would bolster Monsanto's defense of Roundup while giving its new path for growth.
What it means for investors
Monsanto's future doesn't hinge on making the Syngenta deal work, but certainly if successful it could create a bigger, stronger seed and chemical giant.
Still, joining the No.1 and No. 3 seed companies together is a challenge, such that investors should only look at it as an added bonus to the strong portfolio of products Monsanto already owns, as well as the pipeline of innovations it is developing. It spent over $1.7 billion on research and development in 2014, some 12.5% more than the year before.
Yet with its enterprise value trading north of 36 times its free cash flow, Monsanto is not cheap. It also trades at a premium to rivals on the basis of next year's earnings, suggesting that even though the seed and chemical giant's stock is largely flat for the year thus far, now might not be the time to sow a position in the stock.