NEW YORK (TheStreet) -- It hasn't been a great year for Monsanto (MON), which reports fiscal third-quarter earnings results Wednesday before the opening bell. But if the company is not careful, "bad" can turn to worst real quick, especially when money is poorly spent.
With shares down more than 4% on the year and down more than 6% in the past 12 months, the St. Louis-based company is looking to spend billions in M&A to ensure its long-term prosperity. Its top target is Swiss-based competitor Syngenta AG (SYT), which Monsanto offered to buy for $45 billion, which is a 43% premium to Syngenta’s closing price on April 30, prior the bid being made public.
The question is how much sense does a deal make today, especially when acquiring Syngenta doesn't guarantee the boost in revenue and profits that is commensurate to the premium Monsanto seems willing to pay. Monsanto seems to operate on the idea that "doing something is better than doing nothing."
Granted, Monsanto, the world's largest seed producer, owning some 27% market share in all seeds used in modern agricultural farming, is struggling to grow revenue and profits. Some of Monsanto's largest segments, including its corn seed business are under pressure due to (among other things) weak acreage, which is the amount of land devoted to planting.
Complicating matters, Monsanto's agriculture business, which includes the herbicide Roundup, once an offsetting business that helped to temper weak seed sales, has experienced double-digit sales declines of its own.
But Syngenta, which posted a 14% year-over-year revenue decline in its fiscal fourth quarter, has its own set of challenges. Not only was that performance three percentage points worse than the Monsanto's own 11% revenue decline for its comparable quarter, but Syngenta missed Wall Street's estimates by some 10%.
When factoring Syngeta's 7% decline in volume created by business disruptions caused by litigation related to Viptera, Syngenta's GMO (genetically modified organism) corn, there is more risk in Monsanto buying Syngenta than if it opted to sit on its hands and do nothing.
What's more, Monsanto's bid for Syngenta seems like a knee-jerk reaction to an agriculture environment that wasn't expected to be robust this year anyway. That shares of rival DuPont (DD) are also down more 7% in 2015, which shows Monsanto's struggles are not unique.
Monsanto needs to bide its time and get through this trough by focusing on its soybean segment, where sales continue to climb at annual rates above 30%.
For the quarter that ended May, earnings are projected to climb 27% year over year to $2.06 per share, while revenue is expected increase 8 year over year to $4.6 billion. For the full year ending August, the consensus earnings estimate is for a 10% year-over-year increase to $5.77 per share, while full-year revenue are projected to fall almost 2% to of $15.59 billion.
In short, Monsanto doesn't need Syngenta -- not now. With its long-term earnings projected to grow at more than 13% annually in the next five years, Monsanto just needs some patience to execute its business.
MON stock does offer decent value at this level, trading at just 24 times earnings, but it's hard to recommend the shares assuming this deal for Syngenta gets approved. Should Syngenta fall off the table, however, Monsanto stock is a strong bet to reach $130 in the next 12 months, delivering 15% gains.