Even Bad Press Doesn't Curb Monsanto Rally

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It was the best of the times it was the worst of times. It seems that Monsanto Company (NYSE: MON) is experiencing more from the latter than the former in recent days at least from PR point of view. The recent research about the relation between GM corn and cancer in rats (the full article) put Monsanto, among the leading companies in producing genetically engineered seed, in the eye of the Hurricane. This research didn’t help the public view of Monsanto, but for now this research didn't have an actual adverse effect on the company's stock. Even the drought that adversely affected the corn crop in the U.S pulled down its profit margin in the recent third quarter, the company’s stock remained high. Let’s explore these issues and figure what is next for this company.                                                                                                                              

The recent research published in the Food and Chemical Toxicology titled “Long term about toxicity of a Roundup herbicide and a Roundup-tolerant genetically modified maize” became viral in the Internet. The study suggests there is a link between Monsanto's genetically modified corn and cancer (the study used rats to test this hypothesis). Despite the article’s popularity, it was widely criticized by many scientists. You can find here a short critique about the research and the main problems related to the way the researches conducted their experiments. I suspect this bad press might not be a good PR for Monsanto, but eventually it won't have much of an effect on the company's stock. The other matter that most likely did have an adverse effect on the company’s bottom line was the recent hotter than normal summer in the U.S.  

The drought in the U.S may have been among the key factors for the sharp drop in the company's profit margins during the recent quarter. In the recent financial reports for the third quarter the company's revenues declined by 6.1% compared to the parallel quarter of 2011. The company's operating profitability was a loss of 12%; in comparison, in the third quarter of 2011 the company's operating profitability was a loss of 3%. In order to combat the drought, there are reports that the company has recently received an approval for corn that is genetically modified for drought-resistant traits. This might help the company for the next summer, but for this year it will be too late.

Despite the drought and the decline in revenues the company's stock performed well during the year. During 2012, Monsanto's stock rose by 25.8%; as a comparison, the S&P500 index increased by only 14%. Syngenta (NYSE: SYT), a Swiss company that specializes in producing seeds and pesticides, also increased by a high rate of 22.7%. The chart below shows the development of these companies' shares and S&P500 index throughout the year.  

<img src="/media/images/user_12845/syngenta-monsanto-sp500_large.jpg" />

In terms of dividends the above-mentioned companies offer low dividend yields: in 2012,  Syngenta offers a dividend yield of 2.33%, which is nearly $173 per share per quarter. Monsanto offers 1.67% yield, which is nearly $0.38 per share per quarter. These figures show that even thought these companies rallied during the year, they haven't offered a high dividend yield.  

As seen in the chart below, the operating profitability of Monsanto varies substantially on a quarterly basis. The company's operating profitability was worse in the third quarter of 2012 than in the past several quarters. But, as indicated in the chart above, the company's stock didn't stop its upward trend. 

<img src="/media/images/user_12845/monsanto-profitability-2012_large.jpg" />

The Bottom line

The bad press the company received from the recent research on its GM corn isn’t likely to have a substantial adverse effect on the company. The many critics against the research alone are likely to counter the negative press the company had endured. The recent drought didn’t help the company’s revenues or profitability, but investors continue to stick by the company as its stock price further rises. This apparent vote of confidence in the company is likely to keep the stock from tumbling down especially after the company had passed the worse drought recorded in the U.S in recent years.       

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