Thursday, September 2, 2010

Morningstar (Nasdaq:MORN) Begins Monsanto (NYSE:MON) Coverage

Morningstar (Nasdaq:MORN) has initiated credit coverage on Monsanto (NYSE:MON), issuing a rating of A+ to begin with.

From a credit perspective, Morningstar said they like what they see with Monsanto. Their credit-relevant ratios are strong, and even with the downward revisement in earnings, they still have "excellent profitability."

Some challenges Morningstar sees are antitrust issues, ongoing high research costs, and not a high amount of diversification.

Their Roundup herbicide business will continue to be under pressure, as China imports have undermined earnings because of patents running out, although that was expected.

On their newer products, an unexpected challenge from DuPont (NYSE:DD) has put added pressure on them, as the weak ecomony allows them to put the idea in minds of farmers on whether or not they need the pricey traits of Monsanto seeds.

DuPont offers some seeds at far less price, and with fewer traits in them. A significant number of farmers have responded and went that route, putting pressure on earnings there as well, with Monsanto responding by slashing prices in order to get farmers to at least try their newest offerings.

Moringstar says they still like the strong moat Monsanto has built, but it does have some weaknesses now, and DuPont is positioned to take advantage of that if they falter in any way.

This is why as far as credit issues go, research and development costs are so important, as Monsanto must get results there to be able to be profitable for the long term. That's no guarantee, and until the economy changes, pricing will be a major issue for the seed giant.

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