Agricultural company Syngenta (NYSE:SYT) has merged its two major divisions, seeds and crop protection, in an attempt to grow the company.While most observers believe the strategy (announced back in February) has merit for the long term, there is less consensus about chances for shorter term success.
TUTORIAL: Fundamental Analysis
A Major Re-Combining
Syngenta is putting together its two largest divisions in what has been termed a "major restructuring" of the agri-giant.The company plans to use this realignment as a springboard for increased sales of its seed and genomics products as well as its other chemicals, while cutting costs. The company maintains the merger of its units will improve not only cross-selling opportunities for its products, but streamline research and technology within the company. Investors recently have bid up the ADRs on Syngenta, but many are taking more of a wait-and-see attitude on the short-term effects of the moves. (For related reading, see The Merger- What To Do When Companies Converge.)
Syngenta has about a $31 billion market cap, and is the largest agrochemical business in the world. Its $9 billion crop protection division is number one in the world, while its $3 billion seed and genomics business is number three in the world. Its first quarter results reported in mid-April beat estimates and showed a 14% revenue increase from the previous year's quarter to $4.02 billion. Estimates for full-year EPS in 2011 were raised 73 cents to $4.53 and 46 cents in 2012 to $4.98. The company's annual profits in 2010 were $1.4 billion, which have more than doubled in five years, while its annual sales have reached $11.6 billion, a more than 45% increase during the same period. (Companies can manipulate their numbers, so you need to know how to determine the accuracy of EPS. For more, see How To Evaluate The Quality Of EPS.)
More on Syngenta
The recent stock price for Syngenta hit the high-$60s range on ADRs, while the stock has traded between just under $43 to near $72 in the last 52 weeks.The company trades at a PE of 22.4 and a forward multiple of 14.52. Syngenta had long-term debt close to $2.6 billion as of the end of 2010, which was down from $3.3 billion at the end of 2009. Syngenta competes with European-based global giants BASF (OTC:BASFY) and Bayer AG (OTC:BAYZF), along with Dow Chemical (NYSE:DOW), DuPont (NYSE:DD) and Monsanto (NYSE:MON).
In a recent investors' and analysts' conference in London in June, Syngenta CEO Michael Mack maintained that the merging of the two units is already beginning to work and that the cost cutting and growth elements of the plan will pay off . Observers, however, weren't so sure. Some were disappointed by the lack of further specifics regarding guidance for the company's performance.
Syngenta is due to report earnings on July 22, but little additional light was shed on how the changes might already impact the top and bottom lines. Some analysts fear the lack of specifics indicate that the company won't meet its lofty new targets and that its numbers will come in low. Added to this are the concerns that the crop protection business hasn't had a good pricing history in the face of rising input costs. Other concerns revolved around the uncertainty of rebates, corn prices, as well as competition from generics, not to mention continued government controls on genetically modified organisms, or GMOs. Any or all these headwinds may blunt Syngenta's progress.
The Bottom Line
The potential headwinds, though considerable and real, should not dramatically hamper Syngenta in the long run, but may push down its numbers in the short run. That said, we are still in the midst of a global agri-boom, and even the eurozone economic crisis and otherwise slow global economic recovery, while it may forestall major gains, isn't going to stop Syngenta, which is still an ag power. Investors will be keenly watching upcoming results from the company, though. (For related reading on the Euro, see 5 Economic Reports That Affect The Euro.)
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