Missouri-based agricultural company, Monsanto Company (MON) will partner with AgraQuest Inc., a biotechnology company, for three years to use the latter's biopesticide in order to protect its seeds from nematodes, and various diseases and insects. This would help in maximizing the seeds' yield potential and thereby enhance crops and vegetable growth.
Monsanto has been continuously increasing its production and focusing on innovation and upgrading of technology to make farmers more productive. The company also plans to increase production of its SmartStax corn seeds, the most durable and highest-yielding package for total weed and bug control.
Corn seeds and traits contributed approximately 45% of total revenue in the nine months ended May 31, 2010. Thus, increased production will enhance sales and thereby profit will increase based on higher economies of scale. We bank on the company's market leadership and remain optimistic on the near-to-mid-term performance. Moreover, Monsanto's capabilities in biotechnology and breeding research are generating a rich product pipeline, which is expected to drive long-term growth.
Monsanto is growing through its Seeds and Genomics segment, which represents more than 75% of its revenue. In order to further consolidate this segment, the company acquired Aly Participacoes Ltda. (Aly) and the assets of WestBred, LLC in 2009. Although the agricultural productivity segment has encountered significant market changes in the past year, the company's pipeline of agricultural biotechnology products stands unmatched in the industry.
Monsanto recently announced plans to increase the production capacity of glyphosate, a major product of that segment, which will push up net revenues in the coming years.
However, an intensely competitive environment and Monsanto's huge dependence on a few large customers is a risk. Monsanto also faces foreign currency risk since a significant portion of its income comes from outside the U.S.
For the fourth quarter and fiscal 2010, management expects EPS in the range of $(0.09)-$0.11 and $2.40-$2.60, respectively, down from 2 cents and $4.41 per share recorded during the same period of fiscal 2009, respectively. Thus, we maintain our Neutral recommendation and the stock currently retains a Zacks #3 Rank (short term “Hold” rating).
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