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Monsanto’s New Products Have the Potential to Hurt Syngenta
Posted by: Damian Illia (IP Logged)
Date: March 5, 2014 05:28PM

Soybean crops in South America have seen an important push throughout the last decade thanks to the introduction of new products, and an increasing demand for the crop by the Chinese economy. Corn is another crop that has seen important growth in planted areas in the region. Both crops have offered Monsanto (MON) and Syngenta (SYT) an important market to exploit through the introduction of new seeds and crop protection products. And these new products seem to have had a positive impact on the current planting season, aided by steady and abundant showers.

On the Rise

To look at news about Monsanto for clues in regard to its future performance is not a good strategy. More than usual, the bulletins highlight only the negative aspects in a deliberate attempt to hide the company’s products performance. The latest great introduction by the firm has been Intacta RR2, a soybean strain resistant to the major worms that attack the crop, in addition to offering an improved yield and resisting glyphosate applications.

For the first quarter of 2014, Monsanto has delivered some relevant financial results: an 8% rise on EPS and 7% revenue increment year-over-year. Additionally, the company’s pipeline continues to push new products to the shelves. Five new products have seen the light of day after much successful R&D. Moreover, the firm signed a new alliance with Novozymes to produce sustainable microbial products that potentiate farmer resources.

Another move in the growth direction taken by Monsanto is the acquisition of Climate Corporation, aimed at providing unique software and insurance products. The acquisition aligns with the increasing technology introduced to an industry characterized by brute force, while strengthening cash-flow by an estimate $700 million. At the same time, management has hinted the will to integrate the recent acquisition to IFS’s tools and offer a solid technology support to improve overall yields.

Gurus continue to trade on the stock strongly, although buys have not been as strong as during 2013’s last quarter. Nonetheless, overall performance continues to improve. Only cash flow has seen a small decline, deeply related to greater investment on R&D. Given the current good standing, Monsanto’s stock carries a 66 premium to the industry average. Additionally, stock price is on the uptrend.

At a Crossroads

Syngenta is Monsanto’s greatest market nemesis. Although the company was founded in 2000, it holds a long tradition for research and development through the know-how acquired by Zeneca and Novartis. Advances in soybean rust, insecticide treatment, and corn seeds have guaranteed the firm an important market share. However, the firm has not matched the groundbreaking product introductions accomplished by Monsanto.

Being the underdog has allowed Syngenta to avoid much bad publicity, but EPS have declined almost 14% throughout 2013 year-over-year. The fall has been softened by an increment on prices that helped push revenues up by 5%. Bad news continues to loom over the company since expansion has taken the firm to politically unstable regions, aggravated by unfavorable foreign exchange transactions.

The supply chain presents another challenge to Syngenta. Specifically, the single-source supply contracts that accounted for 16% of the total purchases for raw materials in 2013, may lead to a supply disruption and lowering profitability. Additionally, the firm’s heavy reliance on crop protection holds a great potential for performance disturbance. New seeds continue to reduce the application rate of crop protection products.

Financially, Syngenta is at a crossroads as cash flow drops and revenues remain unstable. On the good side, operating margins remain high and ROA continues to improve. Trading at 20.9 times its trailing earnings, the stock carries a 42% premium, and pays a $1.68 quarterly dividend, or 2.27% yield.

Long-Term and Timing

I prefer Monsanto over Syngenta due to its stronger current position and future outlook, deeply related with the introduction of the seed Intacta RR2. Nonetheless, stock price in on the up turn of the cycle. Hence, I believe a position in Syngenta is a smart long-term investment, but understand the timing may not be the most appropriate.

Disclosure: Damian Illia holds no position in any stocks mentioned.

Stocks Discussed: MON, SYT,
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