Morgan Stanley (NYSE:MS) has said Monsanto (NYSE:MON) shouldn't be afraid of adding debt to their balance sheet in order to buy back shares in the company.
"We believe that the company could take on up to - $6.5 bn of debt (-2x net debt to EBITDA), buy back 20-25 percent of shares outstanding, and still have a BBB investment grade credit rating. We estimate this scenario would be 14 percent accretive in the first full year. Importantly, given both the favorable lending rate environment (we estimate debt could be taken on at no more than 4.5 percent) and the company's current 2.3 percent dividend yield, the after-tax cost would be just 0.9 percent," said Morgan Stanley analysts Megan Davis and Vincent Andrews.
Monsanto Chief Executive Officer Hugh Grant had been counting on SmartStax corn seed to make up for the loss of revenue and earnings associated with Roundup herbicide, where generic brands have expectedly pummeled the margins of Monsanto after the patents ran out.
That hasn't happened so far, as disappointing early results are coming in lower than projected, although that could improve as results come in from more northerly states.
Monsanto has projected earnings from SmartStax increasing profits as high as 17 percent. The upcoming earnings report is eagerly being looked to to see if improvements have come from latest field reports.
Morgan Stanley has a price target of $70 on Monsanto, which was trading at $47.66, down $0.60, or 1.34 percent, as 12:52 PM EDT.
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