ST. LOUIS -- Some on Wall Street find the new Monsanto Co. (MON) attractive, despite the fact that its merger with the former Pharmacia & Upjohn Inc. stripped it of its growing pharmaceutical business.
Monsanto and Pharmacia merged in March, creating Pharmacia Corp. (PHA) and giving the new company control of Monsanto's G.D. Searle pharmaceutical business and its much-celebrated arthritis pain fighter Celebrex.
Monsanto, now a unit of Pharmacia, reappeared as a public company Oct. 23 when 38 million shares, about 15% of shares outstanding, were sold in an initial public offering at $20 each. Pharmacia owns the remaining 85%. Monsanto now consists of agricultural productivity and seeds and genomics businesses.
Although it has had a few dips, Monsanto's stock has edged upward since its IPO. It was trading Tuesday at $24 a share.
"The valuation is very attractive at current levels," said Morgan Stanley Dean Witter analyst Mark Wiltamuth in New York. "You're essentially getting the company's ag-chemical business at a reasonable chemical-industry valuation, and you're getting the seed business for free."
Wiltamuth has an outperform rating on Monsanto's stock and a 52-week price target of $30 a share.
One of Monsanto's central products is its herbicide Roundup. Although Roundup's patent expired in the U.S. in September, and expired at least 10 years ago in some other key countries, Monsanto took a proactive approach to the situation. The company lowered prices for some applications and increased sales volume, more than making up for the price cuts.
During the last decade, Roundup prices have dropped about 8% a year, while sales volumes have increased between 15% and 20% a year, said Monsanto Chief Operating Officer Hugh Grant.
Monsanto has also signed some supply agreements with competitors, reasoning that if companies want to compete with them in the market for glyphosate - the active ingredient in Roundup - Monsanto wants them to use its chemistry. The competition pays Monsanto for the active ingredient.
Monsanto continues to introduce improvements to the Roundup formula. This year, for example, it introduced Roundup Ultra in the U.S. The new formula allows the herbicide to better adhere to a plant, which means farmers can apply it sooner after a rainfall than previously.
Roundup will generate $2.8 billion in revenue this year, UBS Warburg analyst Andrew Cash in New York estimated in a recent report. Cash has a buy rating on Monsanto's stock.
Roundup accounts for half of Monsanto's sales and will continue to do so for at least the next few years, Grant said.
"Roundup continues to be a strong product," said Merrill Lynch & Co. analyst John Roberts in New York. "They have successfully competed outside the U.S. without patent protection for many years."
Roberts has an accumulate rating on Monsanto's stock and 52-week price target of $30 a share.
Analysts also see upside for Monsanto's seed and genomics business, which includes conventional and genetically- modified seeds. It's the genetic technology portion of the business to which investors aren't giving value, said Salomon Smith Barney analyst James Wilbur in New York. He has a buy rating on Monsanto's stock and a 52-week price target of $30 a share.
There were 95 million acres of crops planted worldwide in 2000 using Monsanto's biotechnology traits, compared with 85 million acres last year, Monsanto estimated. The fact that the number of acres is increasing is a good sign for the company, Roberts said.
"Farmers are a little more sophisticated than investors give them credit for," Roberts said.
Many people, from analysts to scientists, don't expect genetically modified crops to fade away. Still, criticism of the crops continues in the U.S. and there's even more criticism in Europe.
How quickly consumers embrace biotechnology is the biggest issue facing Monsanto's stock, said Morgan Stanley's Wiltamuth.
"U.S. farmers have strongly embraced biotechnology, but the rest of the world is slower to adopt it," he said. "The U.S. is the first market where it was broadly introduced, and it's the largest and most attractive market."
Monsanto has taken a more proactive approach when addressing concerns about genetically modified crops. The company announced last month that it will restrict sales next year of a type of gene-altered corn and postpone commercialization of another variety until 2002 in an effort to avoid further problems in grain exports. The company also said it will have a more open dialogue on biotechnology.
Still, analysts have other concerns, including what seed revenue will be the next few years and the possibility of genetic competition against Roundup intensifying. Credit Suisse First Boston Corp. analyst William Young in New York has a hold on Monsanto's stock, saying he doesn't see a catalyst for it. Young is concerned about Roundup's profits given that prices are declining and its patent expired in the U.S.
Larry Eakin, research director at Rockhaven Asset Management in Pittsburgh, has Monsanto shares that will convert into Pharmacia shares in a few of the firm's funds. Eakin sees value in Monsanto's stock, but he's not sure how fast it will get unlocked. He's also concerned about the negative press surrounding genetically-modified crops.
In the near term Monsanto's growth will come from optimizing its existing businesses, including the introduction of new Roundup formulas and continued expansion of its seed and genomics business, Monsanto's Grant said. He doesn't see any acquisitions in the picture.
Monsanto's most important near-term opportunities include next generation Roundup Ready corn and the approval of existing Roundup resistant soybeans in Brazil, Merrill Lynch's Roberts said in his report. The strong free cash flow that Monsanto generates - which he estimates will be $300 million in 2001 and more than $400 million in 2002 - will likely be used to reduce debt, he said. As of Sept. 30, Monsanto had slightly more than $3 billion in debt.
Pharmacia used pool accounting when it purchased Monsanto, which means that it has to own at least 20% of Monsanto for two years after the pair's merger.
Once March 2002 arrives, Pharmacia is free to do what it pleases with whatever amount of Monsanto's shares that it owns.
Grant declined to speculate on what Pharmacia might do. It's possible that Pharmacia will spin out the rest of Monsanto or sell the business. However, selling it wouldn't be very tax-efficient because Pharmacia would have to pay a gain, said Merrill Lynch's Roberts. In addition, there aren't many potential buyers out there for a business of Monsanto's size, and antitrust issues could come into play, he said.
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