Morgan Stanley Report is excellent. Here are some details.
01:30am EDT 9-Jul-99 Morgan Stanley\DW (Wiltamuth, Mark MTC DD
MONSANTO COMPANY : SIGNS THAT MONSANTO'S AG BIOTECH STORY IS WORKING / P1
Monsanto Company(MTC): Signs that Monsanto's Ag Biotech Story is
Working
Mark Wiltamuth (212) 761-6294 markwilt@ms.com Date: July 9, 1999
Jami Rubin (212) 761-4651 rubinj@ms.com
Industry: Agribusiness Type: Company Update
______________________________________________________________________
Rating: Outperform Price: $41.88
52-wk Range: $62.81-$34.00 Price Target: $55.00
______________________________________________________________________
FY Ends ----EPS---- ----EBITDA----
DEC Curr Prior P/E Curr Prior EV/EBITDA Pr/Bk
98A $0.93 $ 45.0x $2.81 $ 18.9x 5.3x
99E $0.90 $ 46.5x $3.40 $ 15.7x 5.1x
00E $1.25 $ 33.5x $3.88 $ 13.7x 4.7x
01E $1.75 $ 23.9x $4.54 $ 11.7x 4.0x
______________________________________________________________________
Qtrly ---- 1Q ---- ---- 2Q ---- ---- 3Q ---- ---- 4Q ----
EPS Curr Prior Curr Prior Curr Prior Curr Prior
98A $0.32 $ $0.43 $ $0.13 $ $0.05 $
---------------------------------------------------------------------
99E $0.20A $ $0.45 $ $0.13 $ $0.11 $
______________________________________________________________________
5 Yr. EPS Growth: 22% Debt to Cap.: 59%
Dividend: $0.12 Yield: 0.3% Mkt Cap./Rev: 3.06x
Shares Outst.: 652MM Mkt Cap.: $26,651MM
5 Yr. Est. ROE: 15%
______________________________________________________________________
KEY POINTS
1999 planting season complete, signs are again emerging that Monsanto's ag biotech story is working.
Monsanto's ag biotech acreage has ramped up again.
Monsanto's ag chemical competitors are in pain (and we believe Monsanto's biotech seeds are causing it)
USDA 1998 Ag Chemical Survey highlights market share loss for competitors, gains for Monsanto.
Reiterate Outperform rating and $55 target.
DETAILS:
The 1999 planting season is now complete and feedback from the field is coming in. Major trends established in 1998 appear to have repeated themselves in 1999. Specifically, Monsanto's ag chemical competitors are reporting another year of earnings declines, while Monsanto continues to post strong Roundup herbicide volume growth and ag biotech acreage increases. We believe the pain
being felt by Monsanto's competitors is due in large part to the success of Monsanto's biotech seeds. USDA ag chemical surveys for 1998 confirm that major market share shifts are taking place in the soybean herbicide market - we believe Monsanto's Roundup Ready soybean ramp-up is driving share away from competitors and towards Monsanto's Roundup. Despite herbicide price cuts by competitors, we believe Monsanto took share again in 1999. Similar inroads are
being made in cotton herbicides, and in the cotton pest control market, we believe that Monsanto's Bt cotton (resistant to caterpillar-type insects) is taking sales from insecticide producers.
In short, we believe the pain being exhibited in the ag chemical sector and the
continued positive performance of Monsanto's seeds and Roundup herbicide are signs from the market that Monsanto's ag biotech story is working. Though pharmaceuticals play the primary role in Monsanto's earnings ramp-up over the next 4-5 years (60% of EBIT increase), we estimate that seeds account for 20% of the increase and herbicide 16%. In total, we estimate that Monsanto earnings
will increase from $0.90/share in 1999 to $2.20 by 2002. Given this outlook, we reiterate our Outperform rating and $55 target.
1. Pain Exhibited by Competitors in the Ag Chemicals Sector
American Home Products ($56, Strong Buy) - On June 1, American Home Products
announced that its 1999 earnings would fall short of analyst expectations due to
weak performance in its agricultural segment. In its first quarter, American
Home's ag sales were down 18%. The company's biggest ag segment is soybean
herbicides, which as outlined below, has been losing significant market share
since the launch of Monsanto's Roundup Ready soybeans in 1996.
Dupont ($68, ++) - Citing "intensely competitive market conditions" and its
pending integration of Pioneer Hi-Bred, DuPont recently announced a
restructuring charge for its crop protection business.
Novartis ($74.75, Outperform) - Novartis, which owns the world's largest ag chemical operation, reported a 10% decline in ag sales in its first quarter.
The company replaced the head of its ag division and is reportedly mulling over
cost cutting programs or some other strategic alternative for this business.
2. USDA Survey Highlights the Problems for Monsanto's Competitors
Major Market Share Shifts in Soybean Herbicides
Monsanto has unseated American Home Products as the leader in the soybean
herbicide market. According to the 1998 USDA's Agricultural Chemicals Usage
survey, American Home's Pursuit herbicide was applied on 44% of U.S. soybean
acreage in 1995. By 1998, this percentage had fallen to 17%. Over the same
period, Monsanto's Roundup herbicide expanded from 20% of acres in 1995 to 46%
in 1998. We believe the launch of Monsanto's Roundup Ready soybeans was the
sole driver to this market share flip-flop. Though American Home took the brunt
of the impact, soybean herbicides from DowAgrosciences, DuPont, BASF, Bayer and
Zeneca also posted significant declines between 1995 and 1998. The Roundup
Ready technology enables farmers to apply the Roundup herbicide to their crop,
killing weeds while leaving the crop standing unharmed. As U.S. Roundup Ready
soybean acres expanded from 1 million acres in 1996 to 9 million in 1997 and
then 27 million in 1998, Roundup's share rose. Despite sharp price reductions
by herbicide competitors, we estimate that Roundup Ready soybean acres expanded
to 35 million acres in 1999. Accordingly, we believe Monsanto took share again
this season.
Roundup making inroads in cotton herbicide market
Roundup Ready technology has helped put Monsanto on the map in cotton herbicides
as well. In 1995, Roundup was the #10 cotton herbicide, only being applied on
9% of U.S. cotton acres. After Roundup Ready cotton's launch (in 1997), Roundup
vaulted to the #3 position in 1998, with applications being made on 30% of U.S.
cotton acres. As Roundup Ready cotton acres have grown from 2.3 million acres
in 1998 to 4 million acres in 1999, we expect Roundup's position to increase
again this year.
Monsanto's Bt cotton causing insecticide sales to decline
We believe Monsanto's Bt cotton, which is resistant to cotton bollworms and
budworms, has played a major role in reducing insecticide applications in the cotton belt. Cotton crop advisors and entomologists we interviewed report that Bt cotton has driven reductions in the sales of Rhone Poulenc's Larvin, Novartis' Cucaron and FMC's Lorsban. According to USDA data, total pounds of insecticide applied for these three chemical types fell roughly 80% between 1995
and 1998. Bt cotton was introduced in 1996. (We note that not all of this decline can be attributed to Bt cotton. 1995 was an unusually heavy year for
applications.)
3. Continued Strong Roundup Herbicide Volume Growth
While Monsanto's competitors have been reporting disappointing ag chemical
sales, we expect Monsanto's Roundup volumes to be at or above trendline volume
growth rates of 20% in the company's important 2Q. We maintain our $0.45/share
estimate for 2Q, up from $0.43/share in 2Q98. Monsanto will report 2Q earnings
on July 27.
4. Monsanto's Biotech Acreage Continues to Rise
The 1999 planting season is now complete, and as outlined below, we estimate
that Monsanto has posted another significant biotech acreage increase. These figures are in line with our expectations, with the exception of Roundup Ready corn, which suffered some product returns in the wake of grain processor announcements that crop derived from seeds which had not yet secured EU approval would not be accepted by facilities shipping to the export market. This uncertainty resulted in a Roundup Ready corn planting of roughly 2 million
acres, below our pre-season estimates of 3-3.5 million acres. We do not view
this 1 million acre shortfall as material to earnings (Roundup Ready only
carries a $6/acre price premium over conventional corn).
Monsanto's U.S. Ag Biotech Acreage (in millions of acres)
1996 1997 1998 1999E
Roundup Ready soybeans 1 9 27 35
Roundup Ready cotton 0 0.8 2.3 4.0
Bt cotton 1.8 2.2 2.1-2.2 2.5
Roundup Ready corn 0 0 0.9 2.0-2.2
Bt corn (MSDW ests) 0 2 10 16-18
Roundup Ready canola 0 0.5 3.0 5
Source: Morgan Stanley Dean Witter Estimates
CONCLUSIONS
We believe the market share shifts evident in the 1998 USDA Ag Chemical Usage
report, the recent pain being reported by Monsanto's ag chemical competitors and
Monsanto's continued success in Roundup and ag biotech seed sales are signs that
Monsanto's ag biotech story is working. Though MTC shares have been weighed
down by recent reports of EU concerns over ag biotech, we believe farmer
economics for these seeds remain overwhelmingly positive, and as a result,
Monsanto's biotech seed sales continue to increase. We believe earnings growth
will be the key to MTC shares rising over the next few years. Driven by
pharmaceuticals and also ag biotech and herbicides, we project that Monsanto
earnings will expand from $0.90/share in 1999 to $2.20 by 2002. We reiterate
our Outperform rating and $55 target.
|
