Research over Legal Battles
Monsanto is the largest crop protection and seed producer in the industry with a market cap of more than $54 million. The company has recently made the news in association to a hay producer who was denied the right of export due to genetic contamination. Stock price, however, remains on a steep climb and operations continue as normal.
Results for the last quarter were strong thanks to a higher demand for corn in Latin America and Eastern Europe. In line, earnings and revenues displayed noticeable improvements year-over-year that helped increase cash volumes. The success on performance allows the company to continue feeding its research and development pipeline in the short term. Also, the firm is well known for introducing products to help farmers improve yields and reduce production costs. Hence, the business created an important economic moat for itself.
For the long run, Monsanto needs to develop a new strategy to ease the negative impact from currency fluctuations. Also, a keen eye will have to watch over the research and development pipeline as this is the lifeline for the business. GM seeds already brought many legal battles to the firm´s doors, prompting the company much unwanted publicity. In India, for example, the legal rumbles derived in massive protests asking government officials to ban the company altogether.
Financially, Monsanto is impeccable with a strong revenue, growing cash, and high operating margin. Gurus have seen the potential for growth but also the risks associated with the stock. For example, Steve Mandel of Lone Pine Capital, the largest guru holding the stock, has reduced his position by 20%. Opposite, Andreas Halvorsen of Viking Global Investors increased his position by 747% turning into the third largest guru. I share Halvorsen’s bullish sentiment because the company has experience concerning legal battles, and growing demand for food products guarantees a strong pool of clients for the long haul.
Keeping Up with the Competition
Syngenta is half the size of Monsanto when measured by market cap. Its strength lies in crop protection, but its efforts are now focused on catching up with the competition in the GM seeds segment. In line, the company has recently made the news when making public a strong commitment to develop new wheat strings. More, the firm expects its products to have a great impact in overall yield in the coming years.
In the short run, Syngenta is improving its cost structure and the results have reflected upon higher earnings and revenues. Efforts have also been driven towards catching up with competitors in the seeds segment. Growing demand for farm products and higher yields will serve for an incentive to the firm in its search for glory in the seeds segment. Also, margins tend to be wider in the seed segment. Hence, the firm faces the challenge of replicating success stories researching for the crop protection segment in a new segment.
A great disadvantage that Syngenta faces is Monsanto’s decision to also focus in the same segment. So, both giants will collide head-to-head in a very profitable segment. The fate of both will be decided by its R&D success. Given its size, Syngenta will have to place a greater effort into developing assuming the risk that much of its revenues will be affected to that end alone. Additionally, finances will come under extra pressure as patents from the crop protection segment begin to drop.
Financially, Syngenta is also strong, but indicators have not improved much lately. Gurus have not moved much about this stock. Noticeable is Steven Cohen’s decision to opt out completely, and the lack of position increments by Ken Fisher and Jim Simons, the largest gurus holding shares. I remain bearish about the stock given the great dependence on R&D for the new segment, where it will meet head on with Monsanto.
I prefer Monsanto to Syngenta due to its market position and size. Also, Monsanto can exert price leverage in the crop protection segment limiting revenues for Syngenta. In turn, Syngenta will have less cash to invest in R&D and its future can be greatly jeopardized.
Disclosure: Vanina Egea holds no position in the mentioned stocks.