Monsanto Gets it on the Chops: Black Friday–May 31, 2013. Down 4% and fallling fast.

Monsanto has been on a surge over the past 12 months, up almost 40% YTY and 10% YTD–Until Friday. Earnings were rising and free cash flow was estimated as high as $2 billion.

On Aril 3rd, Monsanto (MON) announced earnings per share of $2.74 for the 2nd quarter of 2013, up 22% from the second quarter of 2012. Expectations were high, the average estimated EPS was $2.58 from a range of $2.40 to $2.71. Fortunately for shareholders, this backs up the high flying stock that is up 10% YTD, 50% above its 52-week lows and with more  upside in-store.

All this despite some heavy and large protests around the world and some serious analysis of the dangers of their scientific with plant fundamentals.

However, the Round-up Ready (glyphosate-resistant) wheat plants found alive and thriving in Oregon ten years after trials have called the basic premise of Monsanto’s efforts to gain control of major crops world-wide into question in a very practical way. Those countries who want to keep natural diversity alive have responded immediately and forcefully. Wheat farmers in America can expect to see their exports shrivel up in a painful fashion. South Korean joined Japan in suspending shipments of America weekly within hours of the Japanese move.

Monsanto’s stock fell four percent on Friday . It is strongly overvalued at the moment and when the hedge funds see the potential, they’re likely to start shorting in a major way.

Here’s one analysis from the Market side; Kevin Quong on Seeking Alpha.


On Friday, agricultural seed and chemical producer Monsanto (MON) endured a strong whiplash from the market upon news of South Korea’s suspension of wheat imports from the United States. The company’s stock fell 4.12% to $100.64 on the news as South Korea became another Asian importer joining Japan’s decision to halt wheat imports from the United States. As of now, the country may not be the last to follow suit as other Asian countries are currently mulling over similar decisions. The international drama appears to have been sparked by concerns over Monsanto’s inability to control its non-authorized genetically-engineered product.

On May 29, the U.S. Department of Agriculture announced test results proving the presence of genetically-engineered glyphosate-resistant wheat plants in samples taken from Oregon. Additional testing showed they were of the same variety Monsanto was authorized to field test in 16 states from 1998 to 2005. Monsanto also claims that the products were of a program ended nearly a decade before the discovery, and was entirely separate from its new field trials now underway for an experimental wheat modified to survive its Roundup herbicide.

However, what has resulted is very quickly growing into a problem that Monsanto would rather have go away. The harsh reaction by countries around the world remains reminiscent of the Mad Cow beef scare more than a decade ago, an incident that crippled global sales of beef as countries banned imports from the United States. Yet unlike that incident in which contamination bore a true safety concern, it’s not believed that such a problem exists with Monsanto’s uncontrolled product. The USDA itself confirms that the wheat variety does not pose a food safety concern.

Implications to Consider

The escalation of a seemingly minute incident to one that is now being played out on an international stage raises many questions as to the market environment that is currently developing. While it is much too early to know how this incident will play out, the harsh reaction against a non-authorized genetically modified wheat variety and its ability to be controlled raises the risk profile of all players within the industry. Companies like Syngenta (SYT), Dow Chemical (DOW), and DuPont (DD) all maintain exposure to the design of genetically modified crops. However, Monsanto and Syngenta maintain the most direct exposure as can be noted in the market’s reaction over the past month.

MON Chart

MON data by YCharts

The concerns against genetically-engineered product contamination extends beyond just Asian importers. Most recently, the European Union also urged its 27 member states to test certain wheat shipments from the United States. Such actions prompt the question of what would happen should contamination be found. As it stands, Monsanto recently announced its plans to halt lobbying for genetically modified plant varieties in Europe citing low demand from local farmers. With such a backlash being felt on the European front as well, the tightening demand profile gives way to the longer-term implications of market expansion opportunities.

The longer-term regulatory environment also remains suspect. The Oregon incident provides additional proof that Monsanto’s non-authorized variety managed to thrive nearly a decade after its testing was completed. More attention may soon be driven to the inability to control plant varieties once they are introduced into the natural environment. The problem would also not be the first instance for Monsanto. A recent documentary named “David Versus Monsanto” highlights this growing problem as one farmer struggled to defend his land against invasive contamination by Monsanto’s products. With the problem now being played out as a global incident, expectations of a tighter regulatory environment is not difficult to imagine.


At its current price of $100.64, Monsanto now trades at a market capitalization of $53.73 billion. This represents an above average price-to-earnings ratio of 19.02 looking forward and a PEG ratio of 1.77. It also represents a somewhat high price-to-book ratio of 4.24 and a price-to-sales ratio of 3.80. Over the past year, the company has also seen its stock rise a healthy 38%.

Having already experienced sizeable gains over the past year, investors might be wise to anticipate additional downward pressure looking forward. Operationally, the company appears to be backing out of a region (Europe) it once found to be ideal. The negative public image is also likely to worsen should the contamination threat turn out to be more prevalent than previously believed. Above all, the market environment is likely to become more volatile as uncertainty becomes more widespread throughout the industry. This is especially so now that the situation is being played out on an international scale.


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