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Monsanto Plowed Down

By Brian Orelli, PhD – Updated Apr 6, 2017 at 12:01AM

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Is it bad news, or a bad-news buy?

It's becoming increasingly harder to figure out whether Monsanto (NYSE:MON) is a bargain or a value trap. Yesterday, the agriculture giant announced less-than-stellar guidance for its 2010 fiscal year, which started at the beginning of the month.

It's really a tale of two product lines for Monsanto. The seed and trait business is growing and competing well against -- and sometimes with -- DuPont (NYSE:DD), Dow Chemical (NYSE:DOW), and Syngenta (NYSE:SYT).

Its Roundup product, on the other hand, is headed in the wrong direction. Once a cash cow, Roundup now faces generic competition, and a glut of chemical herbicides in the supply chain is pushing down prices. Unlike drug companies such as Pfizer (NYSE:PFE) and Merck (NYSE:MRK), which can pretty much kiss off most of their sales once generic competition starts, Monsanto does expect to bring in $650 million to $750 million in gross profits from Roundup in the coming year. Still that's a long drop from the nearly $2 billion in gross profits that the herbicide brought in during fiscal 2008.

In a couple of years, it's not going to matter much: By 2012, the company expects that seeds and licensed traits will make up 85% of the company's total gross profit. But in the meantime, the drop is hurting the bottom line.

Earnings per share, after adding back restructuring charges, are expected to come in between $3.10 to $3.30, a sharp decline from the $4.40 or so that's expected from the recently completed year. Trading at a forward price-to-earnings ratio of more than 24, Monsanto is a little cheaper than we've seen in the past, but it doesn't leave investors much breathing room, if Roundup sales continue to fall faster than expected.

Pfizer is a recommendation of the Inside Value newsletter service. If you're interested in picking through the wreckage for possible turnaround candidates, you should have the Inside Value team on your side. Check it out for free with a 30-day trial.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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Stocks Mentioned

Monsanto Company Stock Quote
Monsanto Company
MON
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$86.78 (-0.83%) $0.73
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$44.08 (-1.10%) $0.49
E. I. du Pont de Nemours and Company Stock Quote
E. I. du Pont de Nemours and Company
DD
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
DOW

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