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Consumer discretionary

Monsanto Company (MON) Upgraded to Overweight, Price Target Increased to $128: JPMorgan

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Monsanto upgraded to Overweight by JPMorgan

Stock rating for Monsanto Company (NYSE:MON) has been upgraded to Overweight, from its previous rating of Neutral along with an increase in Price Target from $100 to $128 by JPMorgan. The analyst at JPMorgan mentioned that shareholders of Monsanto might receive around $128 per share if Bayer closes on its deal to acquire Monsanto.

However, the price could be expected to erode to $90, the price at which Monsanto’s shares had traded previously when the market was unaware of the bid from Bayer back in May 2016. The analyst noted that the risk reward is of $25 upwards or a decline by $13, a probability of 66% for the deal to frustrate while a chance of 34% that the deal would be closed.

The analyst also mentioned that there is a risk of transaction failure in quite a different manner. The research firm expects Monsanto to report earnings of around $5 per share later in 2018, and hence, should be trading at around $100 per share at a multiple of around 20x of its earnings. The analyst noted that the risk in the stock is at $100, while the reward stands at $128.

A much clearer overlap between the two players can be witnessed in Canola Seeds and Cotton Seeds. It expects Monsanto’s revenues from Cotton business in North America to be at $0.5 billion, along with a market share of about 30%, while that of Bayer’s to be $0.3 billion along with a market foot holding of 35%.

Hence, one can expect divestitures from these players in such segments. The basic premise of the combination between the two players is of increasing the speed at which newer products are brought to the market by a combination of seed technology with crop chemical technology.

Moreover, the Sell-Side trimmed its 2018 EPS forecast from $5.95 to $5.00 for Monsanto. Also, the EPS forecast for 2017 has also been lowered to $4.40 from $4.85. Such lower estimates are on back of expectations of lower seed volumes for global corn globally, and also the prices are expected to be on the lower side. All of the decrease in earnings for 2017 is on back of reduced gross profit assumption in corn segment.

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