Monsanto: Bugging or Debugging? - Analyst Blog

The U.S. Environmental Protection Agency (EPA) recently released a Memo warning the Global agribusiness lead, Monsanto Co. ( MON ). The Memo reported loss of effectiveness in Monsanto corn, which supposedly had the bug-resistant property, to kill rootworms. Monsanto corn has been studied across different regions in the US and has surprisingly been reported to lose its competence. According to the scientists, four states in the US have shown evidences that the worms have started developing resistance toward insecticides - failure of Monsanto's debugging proficiency!

The EPA Memo

Based on reports from entomologists and documented cases of severe crop damage, rootworms in four states of Iowa, Illinois, Minnesota and Nebraska are suspected of developing tolerance to the insecticide. The EPA document, an internal memo reviewing damage reports in the US, acknowledged inadequacy of Monsanto's resistance monitoring program in its November 22 issue. The memo finally released on November 30, 2011 on the government website, suggested the expansion of the company's monitoring program in order to curb such inadequacy.

Case studies

Bacillus thuringiensis, (Bt), a natural insecticide engineered into Monsanto Bt corn was the company's Unique Selling Proposition over time. However, according to the Iowa State University study (July 2011), some rootworms have evolved resistance to the insect-killing protein derived from Bacillus thuringiensis. Entomologists in Illinois as well as in other Midwestern states have also been studying similar cases of ineffective bug-resistance in plants over time; wherein the insects are found to feed on the roots of Bt corn.

Management Response

The company's spokesperson, to some extent, cleared the air informing that there is no scientific confirmation of resistance to Monsanto's Bt corn. Management, however, specified that they have taken the EPA report seriously and are committed to increase their efforts training the farmers to respond to such unexpected damage.

Facing the fault

Monsanto products have included saccharin, Agent Orange, DDT, nuclear weapons, aspartame and Roundup weed killer, controls the majority of the world's seeds and almost 90% of the world's genetically modified crops. The company genetically alters its seeds so that the fields can be sprayed with its Roundup herbicide, killing weeds and bugs.

However, the recent failure of the company's debugging expertise in the reported cases needs to answer - is the technology guarded enough to resist its own damages and fight back?

There has been a lot of debate, across the globe, about whether it is safe to have genetically modified foods on plate. Now, if the inadequacy strikes the farmers in the fields as well, can Monsanto withstand criticism? Are they geared to face such malfunction and upgrade accordingly?

Our take

On Oct 5, Monsanto beats the Zacks Consensus by 18.5% in the fourth quarter of 2011. Earnings per share loss of 22 cents came as a surprise above the analyst expectation of a loss of 27 cents per share. Sales in the Seeds and Genomics segment rose 39% to $1.4 billion in the quarter driven by strong global growth in corn and cotton, especially across Latin America.

We opine that Monsanto is still the world's largest seed company. It has a solid 1-year return on equity (ROE) of 14% and the company is expected to maintain double-digit earnings growth for fiscal 2012. Further, we sense that the dividend yield of 1.8% may comfort the shareholders, who have not seen much deviation of the stock from its trading range for 3 years since the Great Recession.

We believe the company's strong research and development strategy will help counter all operational odds that may encroach their solidarity of restoring superior performance. We currently maintain a long-term Outperform recommendation on the stock.

About the company

Monsanto Company is a leading global provider of agricultural products for farmers, operating in Seeds and Genomics and Agricultural Productivity segments. Monsanto's biotechnology research and innovations position it as a market leader above its peers, such as Syngenta AG ( SYT ), The Scotts Miracle-Gro Co ( SMG ), The Dow Chemical Company ( DOW ), BASF SE .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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