Bayer drags Scotts Miracle-Gro down after Monsanto weed killer ruling
Shares of Bayer (BAYRY) trading in New York are sliding after the recently acquired Monsanto was ordered to pay $289M by a California court, who found it liable in a lawsuit alleging that the company’s Roundup caused cancer.
Commenting on the news, JPMorgan analyst Richard Vosser told investors that the selloff in the shares is “significantly overdone” as he sees the potential for the verdict to be overturned on appeal and for the damage amount to be greatly reduced.
Meanwhile, his peer at Bank of America Merrill Lynch argued that the ruling adds cloud over an important product for Scotts Miracle-Gro (SMG).
Last week, a jury found Monsanto, which was recently acquired by Bayer for $63B, liable in a lawsuit alleging that the company’s glyphosate-based weedkillers, including its Roundup brand, caused cancer.
The case against Monsanto is the first of more than 5,000 similar lawsuits across the U.S.
The jury at San Francisco’s Superior Court of California found that Monsanto had failed to warn school groundskeeper Dewayne Johnson and other consumers of the cancer risks posed by its weed killers, and awarded Johnson $250M in punitive damages and about $39M in compensatory damages.
Monsanto, which plans to appeal the verdict, has denied that glyphosate causes cancer and has contended that decades of scientific studies have shown the chemical to be safe for human use.
SELLOFF ‘SIGNIFICANTLY OVERDONE’
In a research note to investors, JPMorgan’s Vosser said he views the selloff in shares of Bayer after a California jury ordered the company’s Monsanto unit to pay $289M for not warning of cancer risks posed by its weed killer, Roundup, as “significantly overdone.”
The analyst added that he sees the potential for the verdict to be overturned on appeal and for the damage amount to be greatly reduced. Overall, Vosser believes current share levels of Bayer provide a good long-term buying opportunity and reiterated an Overweight rating on the name.
RULING ‘ADDS CLOUD’ OVER IMPORTANT PRODUCT
Also commenting on the California court’s ruling, BofA/Merrill analyst Christopher Carey pointed out in a research note of his own that while the product is owned by Monsanto, Scotts Miracle-Gro is the exclusive distributor/marketer of consumer Roundup in the U.S. and Canada, with the brand on track to be about 15% to FY18 profit, but less in FY19 as a 3-year term for $20M annual payments from Monsanto ends in FY18.
Carey noted that he does not expect a ban of glyphosate, but argued that the court decision nevertheless “adds a cloud” over a product which is important for Scotts Miracle-Gro.
While any additional impact from Roundup is unclear, this adds another layer to risks, he contended, highlighting that the company already must overcome a number of headwinds in 2019.
The analyst reiterated an Underperform rating and $74 price target on Scotts Miracle-Gro’s shares. Meanwhile, his peer at SunTrust told investors that there is likely no legal risk to Scotts Miracle-Gro from Friday’s jury verdict in California.
As part of the master agreement between Scotts and Monsanto signed three years ago, Scotts is indemnified from any litigation relating to the Roundup/glyphosate issue, analyst William Chappell pointed out.
Further, the analyst noted that the company is not listed as a defendant in any of the cases filed against Monsanto.
Nevertheless, Chappell estimates that Roundup represents roughly 10% of Scotts’ EBITDA, and believes sales could be impacted over the long-term from these trials.
The analyst reiterated a Buy rating and $100 price target on Scotts Miracle-Gro’s shares.
In Monday morning trading, shares of Bayer in New York have dropped over 10% to $23.75, while Scotts Miracle-Gro’s stock has slipped 2.25% to $73.65.
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