Monsanto (MON) Risk is Priced in And Lower Than Market Thinks, Says JPMorgan; Rating Raised to 'Overweight'
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(Updated - September 21, 2016 8:35 AM EDT)
JPMorgan upgraded Monsanto (NYSE: MON) from Neutral to Overweight with a price target of $128. Despite regulatory hurdles for its deal with Bayer, analyst Jeffrey J. Zekauskas see more upside than downside in the stock. Overall, he thinks risk in the shares and is "less than what the market assumes."
"Monsanto shareholders would receive $128/sh should Bayer close its purchase of Monsanto. Arguably, it would seem that the price would decrease to $90, the price at which Monsanto traded before the market learned of Bayer’s bid in early May 2016, should the deal fail for regulatory reasons. The reward and risk is then $25 up and ($13) down or a 66% probability the deal is frustrated and a 34% chance that it succeeds. But we would look at the risk of the failure of the transaction differently," said Zekauskas.
"We think that Monsanto would earn roughly $5.00 per share in 2018 and would sell at roughly 20x earnings late in 2017 or $100/sh, given its high returns and consistent with its historical valuation, and at 12.1x EV/EBITDA. Many higher quality specialty chemical companies—Air Products, Praxair, PPG, Ecolab, for example—trade at similar valuation multiples. Accordingly, we are inclined to understand the risk in Monsanto shares as $100/sh and the reward at $128/sh. We think that Monsanto is appealing as an investment because the risk in the shares is, in the end, less than what the market assumes," added the analsyt.
Shares of Monsanto closed at $102.88 yesterday.
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