Monsanto to buckle once excitement over Bayer’s bid fades
Last Wednesday, Biotech firm Monsanto (MON) announced that German drug and chemicals company Bayer AG has offered to acquire the former in an all cash deal worth $62 billion. Monsanto, which was trading at about $91 ten days ago, closed at $106 on Monday. Striking a chord with the saying “buy the rumor and sell the news”, a trader should sell the stock currently because of the following reasons.
During the fiscal 2016 second-quarter, the agro seeds and herbicide manufacturer reported net sales of $4.532 billion, down 12.8% from $5.197 billion in the similar period last year. The revenue estimate of analysts was $4.776 billion for the second-quarter. For the second-quarter, the St. Louis-Missouri based company recorded net earnings of $1.063 billion or $2.41 per share, compared to $1.425 billion or $2.92 per share in the year-ago corresponding quarter. The non-GAAP earnings of $2.42 per share also missed the Wall Street estimates of $2.44 per share for the second-quarter.
Going forward, the company expects fiscal 2016 GAAP earnings in the range of $3.72 to $4.48 per share. Monsanto also lowered its fiscal 2016 non-GAAP earnings per share outlook to a range of $4.40 to $5.10 per share, from $5.10 to $5.60 per share. The consensus estimate of analysts is $4.64 per share.
Bloomberg
The fortune 500 company also expects the fiscal 2016 cash flow to range between $1.4 billion to $1.6 billion. The cash flow estimate of analysts is estimated to be in the range of $1.6 billion to $1.8 billion for the current fiscal year. With a discouraging outlook, the shares were trading at about $92 till the news of a takeover bid from Bayer AG came in. The acquisition bid is $122 per share as of now. It is almost 40% higher than the closing price on May 11. Furthermore, considering the closing price of $106 on Monday, arguably, there is not much of a room for the movement on the upside. The PE ratio of the company is more than 32.
Monsanto’s board is yet to respond favorably to the deal. Additionally, the deal has to pass through diligence and regulatory approvals. Thus, we can safely say that the share price would recede in the coming weeks.
Technically, the stochastic indicator reveals a near overbought scenario. Furthermore, the stock has formed a technical gap between 91.79 and 96.08. The price chart also shows resistance at 113 levels.
Thus, it would be prudent to purchase a one touch put option contract to benefit from the probable decline in the price. The binary options trader should also select a strike price of $100 or higher to reduce the probability of a loss. To increase the chances of success in the trade, an expiry date in the third week of June should be selected.
