As seeding progresses, you might be wondering how the agrochemical
companies are doing. They too have been coping with adverse commodity
markets and also might have to deal with a backlash of public opinion
about products such as genetically modified seed.
This has created a climate of change within the ag-biotech sector as
agrochemical companies strive to gain competitive advantage.
A few years ago, life sciences companies were formed by linking
pharmaceuticals, nutrition and agriculture.
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This hasn’t always worked out.
In an attempt to capture more shareholder value for their investors,
some pharmaceutical companies have recently spun off their agrochemical
divisions into separate public companies.
This appears to be strategically prudent in light of the negative
sentiment that agrochemical businesses face from the investment
community, spurred on by environmental and consumer groups.
Monsanto, for example, returned to the market as a purely agricultural
company, leaving the drug business to its parent Pharmacia.
French life sciences company Aventis SA spun off Aventis CropScience.
In the past few years we have seen a massive consolidation in the
sector to create economies of scale.
Syngenta AG, the result of a merger between European agrochemical
companies Novartis Agribusiness and Zeneca Agrochemicals, is regarded
as the world’s leading agrochemical producer with about $7.5 billion US
in sales.
With the recent acquisition of Aventis CropScience, Bayer AG is the
number two player with sales in the neighbourhood of $6.5 to $7 billion.
The “second tier” players are Monsanto Co., DuPont Co., BASF AG and Dow
Chemical Co., which are expected to participate in further
consolidation.
Take Monsanto, for example. Pharmacia Corp. still owns 85 percent of
the public company and it appears it wants to dispose of its holdings
in late 2002. The high cost, estimated at $12 billion, and American
anti-trust issues, may put German BASF AG in the driver’s seat as the
likely suitor.
All of these companies are aggressively pursuing market development
through a variety of means.
Some are buying products from rivals that were forced to divest by
regulators attempting to avoid monopolies.
BASF recently said it wishes to expand its presence in agricultural
products by buying some of Aventis CropScience’s agrochemicals, such as
insecticides, that have to be sold to meet antitrust conditions placed
on Bayer when it bought Aventis CropScience.
DuPont’s acquisition of Pioneer Hi-Bred International Inc., proprietor
of a strong seed bank, positioned it to take on Monsanto, regarded as
the global leader in genetically modified seed.
If you’re interested in the sector, Syngenta AG and Monsanto are the
only true large-cap purely agricultural companies.
Syngenta has been a strong performer over recent months, but is viewed
as being fully valued.
Sales in the first quarter of 2002 were off from the same quarter last
year and the outlook is similar this year.
However, post-merger synergies should result in profit growth because
the company expects annual cost savings of about $525 million per year
by 2004.
You may want to wait for a share price pullback until the trend in
sales becomes clearer. I believe the company has the ability to
increase sales faster than the market over the long-term, given its
strong global presence and leading crop protection portfolio that
includes Achieve and Target.
Monsanto is viewed as reasonably valued.
Its shares now trade at a discount to Syngenta based on 2002
price-to-earning multiple estimates despite the company’s stronger
earnings growth potential from its more extensive biotech pipeline.
The company’s first quarter 2002 sales were seven percent lower than
the same quarter in 2001, due to reductions in crop protection product
sales such as its flagship Roundup herbicide.
This quarter traditionally accounts for one-sixth of Roundup’s annual
sales, and 2002 looks challenging for volume growth.
The seeds and genomics business, however, saw a respectable 17 percent
growth and is widely expected to be the company’s growth segment in the
future. This should support earnings growth and increased shareholder
value, thus deserving attention from the investor who has a longer-term
horizon.
Ian Morrison is a financial consultant with Wood Gundy Private Client
Investments in Calgary and is licensed to sell insurance products. His
views do not necessarily reflect those of CIBC World Markets Inc. or
The Western Producer. Morrison can be reached at 800-332-1407 or by
e-mail at ian.morrison@cibc.ca
