DuPont or Monsanto: Which is the Better Investment Right Now?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
DuPont Co. (NYSE: DD), is facing a couple challenges that has hampered the price of the stock. One being the titanium oxide market slowing down. The second being the judgment against the company in a lawsuit by Monsanto (NYSE: MON). Both companies are deeply embedded in the agricultural business but Monsanto seems to have the edge lately.
Analysts have Different Outlooks on the Two
Jefferies & Co. reduced its recommendation on the stock to hold from buy and also lowered its price target from $62 down to $55. Why the downgrade (besides the deteriorating demand in Europe)? It would be inconsequential to talk about the falling demand in Europe since we all know the situation over there. What is important to mention is the weakening titanium dioxide market. Titanium Dioxide (TiO2) is used quite often for white pigment. The market had a good run for almost half a decade, but now the demand in shrinking and there is an over supply at the same time. Some price decreases of 5-10 cents/lb have begun to surface among coatings and paper makers and plastics compounders. Price hikes cannot seem to get a foot hold while so much product exits on the market. Some analysts believe prices are likely to drop again in the fourth quarter. This has a direct effect upon DuPont’s profits.
For Monsanto though, Piper Jaffray upgraded the company to “overweight” because of numerous tailwinds going into this fall's seed sales and product pricing. Smaller competitors are already pointing to year over year price increases in the 5%-10% range to cover incremental production costs so Monsanto is expected to do the same which will increase its revenue this fall. Recent price increases on domestic RoundUp in the $1.00-$1.50/gal range provide yet another revenue increase for the next growing season.
Monsanto’s $1 billion Judgment
Not long ago, in a jury trial, Monsanto Co. was awarded $1 billion in a patent- infringement trial against DuPont over seeds for growing herbicide-tolerant soybeans. Monsanto’s patent for making Roundup Ready crops, a technology at the heart of its $13.7 billion in annual revenue, was at the center of the controversy. DuPont made hundreds of lines of seeds Roundup Ready Trait with its GAT technology. Farmers love the Roundup Ready trait because it allows them to use the herbicide without affecting crops. Monsanto lawyers argued that DuPont had no right to infringe upon their Roundup technology.
The Roundup Ready trait is engineered into more than 95 percent of soybeans, largely through licensing agreements. This has generated, more than $22 billion in revenue for Monsanto with 200+ seed companies that license the technology. DuPont already engineers soybeans that tolerate ALS herbicides and glyphosate which is an active ingredient of Roundup. Monsanto sued to stop DuPont from adding the Roundup to its GAT soy seeds. U.S. District Judge Richard Webber previously ruled that a second glyphosate cannot be added.
The recent ruling will not cause DuPont anything in the near future but bad press. As with all suites, an appeal will be underway soon. John Dragseth, a patent lawyer with Fish & Richardson in Minneapolis. Says:
“No court is going to let a billion-dollar verdict stand without a hard look.”
This is an important case with high interest. Companies are entitled to improve upon a patent gene and work on it, even if the company has commercial purposes in mind. Did DuPont have a right to experiment upon the “invention” of Monsanto with the intent to improve it? This will be the basis for the appeal. So even though a $1 billion judgment will have no immediate effect upon DuPont, the case will continue to loom in the mind of investors. That is a lot of money to lose and it comes out of profits.
Because of the slowdown in the Titanium Oxide industry and the $1 billion judgment looming over its head, DuPont does not look like the better choice here. I do not question how good of a company it is, it is just that Monsanto has things going its way right now. The increased seed pricing, increase in RoundUp cost, and (the judgment) headwinds favor Monsanto. So, if you are looking at both Monsanto and DuPont for investment, I would pick Monsanto over the latter right now.
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