We are maintaining our Neutral recommendation on Monsanto Company (MON).
We remain concerned regarding the rising cost of production, resulting from a competitive business environment with numerous agrichemical and seed marketers.
To survive such a competitive environment, Monsanto focuses on research and developmental activities which involve huge investments, governmental permits and massive amounts of time. However, there are positive flipsides for such R&D investments as well.
The R&D lineups in molecular-bred hybrid technologies as well as technical collaboration with agri-business research firms continue to support sustainability and modernization in cropping patterns for long-term growth.
Over the last few quarters, the company has witnessed upside in volume and mix benefit within the Seeds and Genomics segment, especially in corn traits. Monsanto successfully increased their yields, while reducing the use of key resources. Such cost-effective business holds optimism for the years ahead.
Anxiety remains with Monsanto’s widespread global business, which exposes it to foreign currency fluctuations, changes in local political or economic conditions, pricing directives, as well as import and trade restrictions. The company strives to manage commodity price fluctuations through future contracts and other hedging mechanisms.
To ensure supply of raw materials even in an erratic seed demand-supply environment, the company enters into contracts with third parties on favorable terms. Moreover, the company’s third party dependence on seeds supply is anticipated to raise operational uncertainty.
The company holds a competitive edge above the other industry players including Syngenta AG (SYT) and BASF SE (BASFY). Monsanto currently has a Zacks #2 Rank, which translates into a short-term Buy rating (1-3 months).
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