Smart Investors Need to Dump This
StreetAuthority | Apr 12, 2012 08:35AM ET
As Warren Buffett, George Soros and so many others have said, you need to swim against the tide, finding values where others miss and shunning stocks that are loved by all.
Back in the summer of 2010, agriculture firm Monsanto (NYSE: PFE )?
With the exception of 2009 and 2010, when Merck completed a pair of large acquisitions, sales have not grown more than 5% at any point in the last decade. EPS in 2011 was roughly 30% lower than it was a decade ago. As a result, Merck's stock started to garner an ever-lower price-to-earnings (P/E) ratio.
There's one clear connection between Monsanto and Merck: Each once spoke of a blockbuster product or two that could fuel tremendous growth, but each eventually has come to rely on a series of smaller hits to keep that ball rolling. As UBS' Andrew Cash recently noted, Monsanto's CEO is "increasingly spending more time discussing its multiple sources of future earnings, including integrated farming systems, and almost no time on new blockbuster product introductions. We believe this is code for slowing overall EPS."
You can see that slowing growth by walking through updated projections provided by Merrill Lynch. After boosting EBITDA 22% (to $3.05 billion) in 2011, they see EBITDA rising 19% this year, 11% in fiscal 2013 and 5% in fiscal 2014.
When "neutral" is a "sell"
Here's the tricky thing: Nobody on Wall Street will tell you this stock is going to go down.
Indeed, this is a stock that has made bullish analysts look smart in front of their clients, and they need a reason to keep getting in front of those clients if they are to secure a meeting at all. Sadly, that's what more than 10 years of working on Wall Street taught me.
UBS, in laying out its concerns, only has a "neutral" rating, lest the firm's analysts end up in the doghouse with Monsanto's management. Goldman Sachs also recently lost its appetite for this stock, removing it from the firm's "Conviction List." But they still suggest the stock deserves to trade at 20 times projected fiscal 2013 EPS of $4.38. Yet as noted earlier, slowing growth more likely argues for a slowly falling multiple. Monsanto's projected rates of growth are unlikely to support an EPS (and thus, a P/E ratio) that high.
Risks to Consider: Monsanto still spends huge sums on R&D, and those efforts may still yield another blockbuster product to bolster future sales.
Action to Take --> Note the phrase "slowly-falling multiple." There's no reason to expect this stock to fall out of bed quickly, but it appears to have peaked after a solid two-year run. A high multiple and slowing growth is never the recipe for further upside.
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By David Sterman
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