Monsanto: The Dark View

(Monsanto story updated with further analyst commentary.)

NEW YORK ( TheStreet) -- According to the prevailing wisdom on Wall Street, Monsanto ( MON) has moved in the right direction as it strives to revive itself after an ugly debut for its crucial new bioengineered corn in 2010.

Last year, after a rebellion among its farmer-customers forced the company to cut prices for its latest test-tube maize, Monsanto had to repeal the ambitious growth goals it had set for the next three years. Its stock fell 20% in 2010.

With the dawn of a fresh year, investors appear to have put much of that bad news behind them. Monsanto's efforts to right itself are only a small part of the reason, of course. An unprecedented farm boom, driven by inflating agricultural commodities prices the world over, has lifted Monsanto stock out of its doldrums. Since bottoming out near $48 in October, shares of the St. Louis company have gained 40% and touched a 52-week high of about $77 on Feb. 2. Midday Thursday on the New York Stock Exchange, they were trading at $70.25.

Many sell-side analysts are bullish on Monsanto. Of the 22 who cover the controversial crop-seed and chemicals giant, nine have the equivalent of buy ratings on the stock, while 12 maintain hold or neutral ratings.

The latter group includes Horst Huenikin, of Stifel Nicolaus in Toronto, who feels the Monsanto stock has too ripe a multiple at the moment, having reached a P/E ratio of 23, based on the company's guidance for calendar 2011 earnings. "That number is fair, but it's certainly not undervalued," he said. "On the other hand, it's not so extreme to tell people to dump the stock either."

And then there's the analyst who does have a "sell" rating on Monsanto -- the outlier uber-bear and constant contrarian who has had a negative view of the company for nearly two years.

His name is Paul Christopherson, and he works for Gilford Securities, the small New Jersey broker-dealer perhaps best known as the place where a young Jim Chanos cut his teeth as a short seller.

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Though Christopherson doesn't advise shorting Monsanto's stock, the idea implicit in his negative recommendation is, theoretically, to do just that -- a trade that would take some blue-ribbon cajones, or a severe bout of madness, here amid one of the greatest agricultural booms of all time. Not many have been that brave or that crazy: as of Feb. 15, short sellers commanded only 1% of Monsanto's float.

As Christopherson wrote in his latest Monsanto missive, released earlier this week, "In the near term, Monsanto will benefit greatly from the recent reflation of what is, in this analyst's opinion, a commodities bubble, especially in corn and soybeans."

With market momentum in commodities squarely to the upside, "that's my only hesitation about being short," he said in an interview.

True to Gilford's Chanos legacy, Christopherson has a morbid long-term view of Monsanto and its business prospects -- the company, he says, is in the midst of a protracted "unraveling process" -- and it has little to do with the sort of criticism leveled at Monsanto from environmentalists or the documentary Food Inc..

Though he's of the opinion that the general commodities bubble could burst after the Federal Reserve pulls out its QE2 props, his thesis really boils down to one thing: corn.

More than any other single product, Monsanto's business and growth goals now depend on corn seeds and traits, including its new SmartStax-branded genetically modified maize product, which debuted on the market last year. Corn-related seeds and traits now account for just shy of 50% of the company's gross profit.

According to Christopherson, this is bad news. He offers up the argument that corn prices, which have pushed above $7 a bushel for the first time ever, depend entirely on ethanol. And the ethanol industry, which bought some 35% to 40% of the U.S. corn harvest last year, depends entirely on government subsidies. And government farm subsidies, despite a powerful lobby in Washington, may come in for attack in the new budget-conscious Zeitgeist on Capitol Hill.

"At some point here, we'll have to address the nuttiness of ethanol, and burning it in cars," Christopherson said. "Everybody in the room knows that's just nuts."

Thus, he believes, if the subsidies go, so do these historically elevated corn prices. Farmers are richer than they've ever been, according to the USDA, which has forecast all-time high income levels for growers this year. If flush ag pros looking to hike yields will allow Monsanto to sell more and higher priced maize seeds, then any drop in corn prices will take its toll on the company's sales, as it will on many correlated agriculture names, like fertilizer producers and tractor makers.

Others counter that the EPA's recent approval of a new ethanol-gasoline blend for cars, called E15, is a sign that the government isn't about to back off on subsidies

Christopherson also argues that growing competition from the likes of Dupont ( DD) and Syngenta ( SYT) will no longer lend Monsanto the pricing power it had previously held over farmers. Further, there's the worrisome trend of weeds becoming resistant to herbicides like Monsanto's classic RoundUp -- indeed, it has been Monsanto's basic business model to sell seeds genetically programmed to withstand its own chemical weed-killer spray. And, doubly further, Christopherson is unconvinced that the company's SmartStax seeds will offer enough yield gains for farmers to justify their use.

Monsanto begs to differ, of course. The company has pointed out that the yield scare early in the 2010 harvest season, when analysts worried that SmartStax wasn't producing as many bushels as promised, was just that: a scare.

In November, Monsanto evaluated the final data from last year's SmartStax crop -- the first year those seeds were on the market -- and called it a success, saying that it had produced 3.6 more bushels per acre than Monsanto's old corn-seed product.

The initial scare erupted after early data suggested that SmartStax was doing worse than the older product. According to some who have a wide-angle view on the farm industry, growers remain skeptical about the performance of SmartStax. "If there was a differential it was either negligible or marginal, and it didn't justify the higher cost," said Jon Gates, research director at OTR Global, which conducts ground-level channel checks with farm-supply dealers and growers and provides industry data to institutional investors. "At the end of day, a farmer is managing a portfolio of crops, just like a money manager on Wall Street, and they need a return on it."

Monsanto did cut prices for SmartStax last year based on the lackluster performance. Pricing in the seed business is enormously complex, but boiled to its essence, Monsanto used to take a 50% cut of the incremental revenue per bushel that farmers obtained from higher yields produced by a new Monsanto seed product. Now, the company has slashed that premium to 20%.

But that won't likely convince farmers to fall in love with the SmartStax seed, Gates told the TheStreet. Instead, he said, Monsanto was surprised last year to see that a pair of other new corn-seed products, called Double Pro and Triple Pro, impressed farmers with their yields and started selling as fast as funnel cakes at the Illinois State Fair. But the seeds were so new that Monsanto had put them on the market in a limited release.

Now, Gates says, the company has scrambled to shift its product mix, pumping out as much of the Double and Triple Pro as possible in order to meet demand. The company won't likely take real advantage of that trend until 2012, by which time it will be able to ramp up production.

"The mood has swung back favorably toward Monsanto," Gates said. "But not toward SmartStax yet."

In its first-quarter conference call with analysts in early January, Monsanto's energetic Scotsman CEO, Hugh Grant, made sure to address the whole corn-seed issue. "But what matters more than our data is that our customers have responded to both the product and the pricing changes that we've made, and that feedback is good," he said. "At this point in the year, you can't really declare a victory, but you do know if you're off plan, and I'm pleased to say that we've seen all the right indications at this point."

In the very long term, Monsanto has much in its research-and-development pipeline, something it strives to ballyhoo as much as it strives to deflect those who criticize genetically modified food and monoculture crops. Naturally, Christopherson has reservations about the pipeline. "It consists of things that are really just tweaks," he said. "They're not life-changing for the grower."

It remains to be seen who will declare victory in the long run: the CEO or the uber-bear.

-- Written by Scott Eden in New York

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