Monsanto Valuation

Monsanto

Valuation report

Corporate Valuation, 10-17-2014

Executive Summary

In the present report, the following aspects of Monsanto were presented & analyzed:

• Background of the company, general public opinion and upcoming trends were scrutinized, to provide the framework for judging company fundamentals and building projections
• The different costs Monsanto generates, from historical perspective and on comparative basis, using industry averages
• The Cash flows the company generates, in the light of its leverage, ROC, ROE, growth, for to establish how to value the company
• Monsanto’s firm value over a 3-stage growth model was established using DCF
• The valuation was subjected to sensitivity testing, to establish the effect of different fundamental inputs into the valuations.
• A comparative valuation model: relative valuation was introduced, to put the firm once again if its industry perspective.

A conclusion was drawn on the value of Monsanto: the current report does find the company undervalued & the following pages provide details.

Background

Monsanto is a worldwide biochemical company that nowadays produces and sells genetically modified seeds and herbicides to farmers. The company has 2 business segments: Seeds and Genomics, and Agricultural Productivity. The products Monsanto sells make farming less time consuming and helps optimizing crops. For years, the company has been active on a variety of fields, such as producing plastics, caffeine and aspartame. The company employs over 20.000 people and operates worldwide.

Among the challenges the company faces in the EU market is the more strictly regulated genetically modified organism (GMO) regime. Monsanto uses GMO’s in their products and provides them to farmers and this is allowed without any labelling requirements, hence the consumer doesn’t know about it. In the EU, however, there is either a labelling requirement or a complete ban on the use of GMO’s. Therefore, Monsanto faces the risk of consumers backing off, not being willing to buy the end product. Also, there is the risk of competition in Europe, because Monsanto is ‘new’ to this market, there are only minor barriers to entry for competition.

Overall, Monsanto is market leader in its core activities, which is positive as far as competition is concerned, merely because of the patents Monsanto holds towards its product. Also, as worldwide population is growing and living space is declining, there is an increasing demand for using the available farming fields in an optimal way. The market this company is in is one of first life necessities and therefore seems stable. Strategically, as Monsanto has consolidated multiple biotech companies over the past decade, its status as market leader is expected to be prolonged.

However, as the awareness of and regulation on the potentially harmful ingredients of GMO’s grows, Monsanto might end up having a bad reputation which might influence sales. Also, competition could harm Monsanto by invention of products which are more protective towards the environment than Monsanto’s GMO’s. Especially in Europe, this is of growing concern for Monsanto, because of the low market share in there.

All in all, future growth is likely to be secured, but only if Monsanto keeps investing both strategically to not give away its market share towards competition, and sustainably to not lose customers on a bad reputation of products the company uses.

Monsanto’s two business segments are Seeds and Genomics, and Agricultural Productivity.  The Seeds and Genomics division is subject to the Chemical (specialty) industry. Other companies in this industry are BASF S.E., The Dow Chemical Company and E.I. Du Pont de Nemours and Company.

The Agricultural Productivity division is subject to the Farming/Agricultural industry and has the following comparable firms: Potash Corp. of Saskatchewan, Inc, Syngenta AG and E.I DuPont.

Cost of Capital

The risk-free rate for Monsanto is chosen as 1.73%, US 5-year government bond yield. Since the beta derived is from 5 years data sample, daily frequency, the choice of bond was such as to reflect the choice of horizon considered relative and representative for the company. Even though the company is considered to sustain growth far in the future, reinvestment potential after the fifth year is considered as well, as Damodaran (2006, p. 35) suggests; choosing a corresponding time horizon for the risk –free rate also allows for the reinvestment potential after its expiration. Since the contemporary investors can be considered as diversified as to revise their investment mixes at least annually, the choice of 5 year government bond is adopted.