When you write about investments, sometimes you recommend a stock and readers immediately tell you you're dumb. With a small subset of shares, however, a "buy" suggestion gets you called unethical or even immoral.
Such is the case with Monsanto Co. I praised the shares in 2014 and unsurprisingly ran into the buzzsaw of the agri-giant's fiercest critics, who look at decades of innovations in herbicides and genetically modified seeds and see the company as enemy No. 1 in the fight against "Frankenfoods."
As it happens, Monsanto is now slated to merge with German chemical giant Bayer AG – which continues to deal with its legacy as part of the conglomerate I.G. Farben, an essential enabler of Hitler's war machine and the Holocaust. Today's Bayer was reconstituted after the Second World War, but its slowness to apologize for its predecessor's ties to the Holocaust means there are plenty of folks today, Jewish and gentile, who won't touch the brand.
"That Bayer would dare a takeover of a company the Frankfurt daily newspaper has called among 'the most hated,' and the Munich daily has called among 'the most feared' companies in the world is a sign that Bayer itself trusts the power of forgetfulness," writes Stefani Engelstein, an associate professor of Germanic languages and literature at Duke University, in the liberal Israeli newspaper Haaretz.
Powerful stuff. But it's not these views that have depressed the shares of both companies since they announced the merger. Monsanto closed Friday at $105.21 (U.S.), well below the all-cash Bayer offer of $128, because market skeptics look at the need to get the blessings of regulators in more than two dozen countries and place significant odds on the deal failing.
Bayer, meanwhile, has alienated shareholders who see its Monsanto offer as expensive, given their expectations for a lengthy trough in the agricultural cycle, and an unwanted distraction from Bayer's core pharmaceutical business. "Health-care investors," Citigroup Global Markets Inc. analyst Peter Verdult wrote in September, "are broadly turned off by the evolving equity story at Bayer."
The combination of pessimism presents an interesting buying opportunity for both stocks, however. Investors who want to bet on the successful completion of the Bayer-Monsanto merger will make a tidy profit at the agreed-upon price. And investors who take the long-term view on agriculture, and are willing to hold a more diversified company than today's Bayer, will ultimately benefit from the German company's decision to make its move at a time when so many are so downbeat on agribusiness stocks.
To do so, of course, is to swim against the tide. Typical of the sentiment right now is a piece this week on The Motley Fool, Why Bayer's Deal to Buy Monsanto Makes No Sense. (Secondary headline: There's no way this is a good deal for Bayer's shareholders.) In addition to the regulatory risk – the author suggests Wall Street consensus is there is only a 50-per-cent chance of approval – the Monsanto acquisition is "a defensive move, not an offensive one," a reaction to other chem megamergers such as Dow Chemical Co. and E. I. du Pont de Nemours & Co.
Bayer chief executive officer Werner Baumann, however, has his eye on the long term, where over the next decades food production will need to grow to support a global population of more than 10 billion people – and despite opposition to GMOs in his own home country, a key part of the solution will be Monsanto's herbicides, seeds and whatever other products the highly innovative company creates. The current ag funk, driven by good weather and overproduction, will turn soon enough to make today's purchase of Monsanto look deeply optimistic, he believes.
But what of Bayer's prospects without the Monsanto addition? Investor perception of Bayer's drug pipeline is "poor," notes Mr. Verdult of Citigroup – a perception with which neither he nor Morningstar's Damien Conover agree. Mr. Verdult believes Bayer can outperform pharma peers with annual earnings-per-share growth of 7 per cent from 2017 to 2022. It's a tasty possibility for a stock that trades at roughly 12.6 times the next 12 months' earnings, according to Standard & Poor's Global Market Intelligence. With a target price of €120 ($170), Mr. Verdult sees roughly 20-per-cent upside from Friday's closing price of €99.13.
Today, Morningstar rates Bayer a four-star stock in its system, as it's bumped up about 12 per cent from its November lows when the share merited the rare five-star Morningstar rating. Mr. Conover says he continues to view the stock as "undervalued," with concerns over Bayer's drug pipeline "overdone."
"Given the long patent life of several of Bayer's recently launched drugs, we believe the firm has time to develop its early-stage pipeline further," he writes. And, he adds, people still buy plenty of Aspirin and Aleve despite tons of generic competition. (He estimates the stock's fair value at €126, or $139 for the American depository receipts that trade over-the-counter in the United States.)
While analysts are evenly divided on Bayer – the 31 who cover it are split between buys and holds, with only two sell ratings in the group – there's a bit more enthusiasm for Monsanto, particularly given the gap between the offer price and current levels. Mr. Conover's Morningstar colleague Jeffrey Stafford sees a stand-alone, unacquired Monsanto worth $120. He puts a 75-per-cent probability on the $128 offer succeeding (there isn't much overlap between the company's product lines), so his blended valuation is $126 – a roughly 20-per-cent premium over Friday's close.
Monsanto's pioneering Roundup has been hurt by generic competition, and of course, anti-GMO sentiment remains a significant obstacle for the company. But, Mr. Stafford notes, Monsanto basically created the agricultural biotechnology market where it now competes, and about 90 per cent of the soybeans and 80 per cent of the corn grown in the United States contain a Monsanto trait.
There certainly may be investors who can't stomach either Bayer or Monsanto, for either their history or their present activities. For all others, however, their current disfavour may make them a "buy" – and I don't mind being called dumb for suggesting it.
David Milstead