In order to assemble a healthy portfolio, investors should currently avoid material stocks like Monsanto MON . Investment in poorly ranked material stocks would not be very rewarding right now, as these companies are presently confronting several headwinds.
Why to Shun Monsanto?
Monsanto’s shares gained 3.8% to $ 107.44 as of Aug 30, 2016. The upside reflects investors’ confidence on the stock. However, the company’s lackluster third-quarter fiscal 2016 results connote the existence of certain setbacks troubling its business. Over the last four trailing quarters, Monsanto has generated an average negative earnings surprise of 437.98%, missing estimates thrice amongst the four quarters. Zacks Consensus Estimate for the stock is pegged at a loss of 2 cents for the current quarter over the last 60 days. The same has been revised downwards both for fiscal 2016 and 2017, over the preceding 60-day tenure.
Weak Q316 Results
In third-quarter fiscal 2016, Monsanto’s diluted earnings missed the Zacks Consensus Estimate by 10% and also fell short of the year-ago tally by 13.5%. The company stated that certain temporary tribulations such as restructuring charges, litigation & environmental issues, and the Argentinean tax-associated problem had weighed over the quarterly bottom-line figures.
However, we recognize that earnings of Monsanto were also hurt by lower revenues in fiscal third-quarter. Quarterly revenues lagged the Zacks Consensus Estimate by 5.3% and decreased 8.5% year over year. Commercial hitches such as absence of Scotts Miracle-Gro Company’s $ 274 million licensing deal, delayed European Union import approval for glyphosate weed-killer, greater pricing regulations & lower cotton acreage in India, weak prices Round-Up Ready Xtend and glyphosate as well as lower volumes of soybeans hampered Monsanto’s revenues and earnings in third-quarter fiscal..
Outlook
Monsanto perceives that dismal pricing conditions, lesser number of non-core licensing deals, anticipated rise in commissions & incentives, rise in inflation spend and currency related issues would continue to weaken its financial recital in the quarters ahead. Owing to these bearish facets, Monsanto projects to accrue earnings at the lower end of the range $ 4.40-$ 5.10 per share for full-year fiscal 2016, predicting currency headwinds of 85 cents per share.
Bayer’s Sweetened Buyout Offer Still Open
Bayer AG had revised its acquisition proposal for Monsanto in Jul, 2016, after the company turned down its initial takeover bid on grounds of being “insultingly low.” Bayer sweetened its pot by raising the bid to $ 125 per share, at a premium of 16.3% over the closing share price of Monsanto on Aug 30. Though Monsanto has again rejected Bayer’s revised offer on grounds of being financially inadequate; doors for further negotiations are still open. We believe that Monsanto has not given up on the possibility of a meatier deal to grapple with the problems encountered by its business.
Though the company remains bullish in boosting its financial fundamentals on the back of greater innovation, higher yield and improved operational efficacy; we offer it’s stock a Zacks Rank #5 (Strong Sell) status on grounds of the aforesaid mentioned adversaries.
A Broader View
We deem that Monsanto’s performance is currently fragile due to several industry-specific headwinds. Negatives like economic slowdown in booming nations like China, cyclical downturn of agricultural industry, low prices of agro products, strengthening U.S. dollar, devaluating Argentinean Peso and extensive industry rivalry are the major causal factors weighing over the company’s financial fundamentals in recent times.
At this stage, companies within the worldwide seeds, traits and agricultural chemical industry are banking on the strategy of consolidation to brave headwinds. Notably, DuPont and Dow Chemical agreed upon a $ 130 million merger deal in 2015. In Feb 2016, Syngenta agreed to be bought by ChemChina for $ 43 billion.
Monsanto conducts its trade within the agricultural products industry, broadly grouped under the Basic Materials sector as per Zacks Industry classification. Our latest Earnings Trends article (dated Aug 24, 2016) confirms that the sector has largely underperformed this earnings season (Q216). Notably, the sector has witnessed a decline of 11.6% and 8.9% in earnings and revenues, respectively, in the second quarter.
Zacks Counsel
Investors can be winners only by apportioning their funds with a clear roadmap in the current indecisive equity market. At this stage, we recognize that investors can do well by avoiding or discarding poorly-ranked basic materials stocks from their portfolio.
At this moment, apart from Monsanto, we consider the following four poorly ranked materials stocks to be less investor friendly!
Syngenta AG SYT , Switzerland based agribusiness company currently carries a Zacks Rank #4 (Sell).
Albemarle Corporation ALB , Louisiana based specialty chemicals’ company presently holding a Zacks Rank #5.
Cabot Corporation CBT , Massachusetts based specialty chemicals’ company currently holding a Zacks Rank #5.
Methanex Corporation MEOH , Canadian specialty chemicals’ company carries a Zacks Rank #5.
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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.
Plantations International