Monsanto stumbles

Investors who dumped Monsanto after its profit warning on Wednesday should rest assured the agricultural science company is hardly going to seed. The reason for the shortfall is lower gross profit for its blockbuster herbicide. Roundup should make $2bn this year, down from a forecast of $2.4bn due to unfavourable weather and worldwide oversupply. Increased generic competition should cut that to $1.9bn next year, estimate analysts at Morgan Stanley, but clever new products such as drought-resistant corn are the company’s future.

Chief executive Hugh Grant has reassured investors about dependence on Roundup, predicting the volatile cash cow will just be a “hum in the background” by 2012. It is hardly immaterial at 36 per cent of sales last fiscal year, up from 33 per cent in 2005. Its importance should shrink as promising new genetically modified products make Monsanto less directly dependent on the herbicide. “Directly” is the key word as Monsanto’s seed business depends on Roundup-resistant varieties that help drive herbicide sales. Another threat comes from alleged intellectual property infringement, currently the subject of litigation against rival DuPont, which also markets Roundup-resistant seeds.

Monsanto’s ability to manage a decline in Roundup is a legitimate concern along with opposition to “Frankenfoods” in some key markets. Even so, the risk-reward trade off for Monsanto looks encouraging. Worldwide demand for grains is growing much faster than overall population as an emerging middle class in the developing world acquires a taste for meat. For a company instrumental in squeezing higher yields out of finite arable land, that potential outweighs intellectual property risks. The 45 per cent sell off from their peak a year ago leaves Monsanto’s shares at under 19 times current earnings expectations while earnings growth should top 20 per cent this year and remain strong in the medium-term. In a business where competitors are growing like weeds, Monsanto’s strong intellectual property deserves a premium.