Does Monsanto's Stock Price Account for All the Potential Risks?

NEW YORK (TheStreet) -- Monsanto (MON) is a company many Americans love to hate.

Whether it's the most-hated company in America, as Waking Times puts it, or just the third most-hated, as a recent Harris Poll found, there is no doubt that Monsanto's genetically modified seeds and Round-Up pesticides are controversial.

But the controversy has done nothing to dent the company's stock. At its current price of $125, Monsanto has a price-to-earnings ratio of more than 25, based on 2014 earnings.

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Analysts from Morgan Stanley to our own Jim Cramer call it a buy. In fact, only one of the 22 Wall Street analysts following the stock has a negative rating on it. 

Some of the praise results from sound financial engineering. Monsanto recently sold $4.5 billion in debt to help fund $10 billion in share buybacks.

Paying interest on debt cuts pretax profits, and taxes. The company reportedly considered buying Syngenta (SYT) and moving its domicile to Switzerland to reduce its tax burden but chose the path of least regulatory resistance.

Monsanto's new target is to double net income per share by 2019. The buybacks mean it won't have to actually double its net income to do that.

The problem is, as it once was with Apple (AAPL) at $700 and Amazon (AMZN) at $400, that Monsanto stock is currently priced to perfection and everyone seems to be on its bandwagon. Its P/E ratio is well ahead of DuPont's (DD) or Syngenta's 21. Among chemical companies, Monsanto is the most loved stock on the board.

As Fortune noted recently, Monsanto or its patent licensees sell 80% of the nation's corn seed and 90% of its soybean seed. These tolerate its toughest pesticide, Round-Up, for reliably high yields.

Still, risks exist, and they don't seem to be priced in.

For instance. Round-Up's active ingredient is glyphosphate, a powerful herbicide against all plants. How toxic is glyphospate? Some scientists say it's extremely toxic. Monsanto disagrees.

What if Monsanto is wrong?

Monsanto seeds are coated with a neonicotinoid, chemically similar to the nicotine in cigarettes. Research at the University of Maryland has blamed neonicotinoids, in part, for the collapse of honey bee populations. Monsanto says it is researching solutions, pointing to Department of Agriculture statements saying the cause of bee colony collapse is complex.

What if Monsanto is wrong?

Pests adapt quickly to environmental changes. Some are adapting to Monsanto's GMO seeds and making a comeback. Monsanto is involved in an arms race with the creatures that prey on food crops. What if it loses?

What if the pests adapt and all the bees die?

There is popular resistance to Monsanto in France, in Hungary, across the Muslim world, even in Hawaii. Monsanto is fighting back and had a $7 million lobbying budget in 2013, along with a PAC that has spent almost $600,000 so far in this election cycle.

One of the recipients of Monsanto's cash was former House Majority Leader Eric Cantor. What if money can no longer buy Washington's love?

These seem like small risks. But they are risks. They don't seem reflected in either the stock's current price or analysts' expectations for it.

I contacted Monsanto about these risks but received no comment by press time.

At the time of publication the author owned shares of AAPL and AMZN. 

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


Now let's look at TheStreet Ratings' take on this stock.

TheStreet Ratings team rates MONSANTO CO as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate MONSANTO CO (MON) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, solid stock price performance and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite its growing revenue, the company underperformed as compared with the industry average of 7.1%. Since the same quarter one year prior, revenues slightly increased by 0.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • MON's debt-to-equity ratio is very low at 0.22 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, MON has a quick ratio of 1.76, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for MONSANTO CO is rather high; currently it is at 58.96%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 20.18% is above that of the industry average.
  • MONSANTO CO' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MONSANTO CO increased its bottom line by earning $4.56 versus $3.78 in the prior year. This year, the market expects an improvement in earnings ($5.22 versus $4.56).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Chemicals industry and the overall market on the basis of return on equity, MONSANTO CO has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.

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