Update: Syngenta Earnings-The Time Has Come To Consider The Market Leader In Agrochemicals

Jul.28.14 | About: Syngenta AG (SYT)

Summary

Since my first article on Syngenta in May 2014, the share is down by 8%.

The Q2 results send mixed signals, but the overall perspective for the stock remains very good.

Given the short-term outlook for the agrochemical industry, it is likely that attractive buying opportunities for long-term oriented investors will materialize over the next 6 to 12 months.

Two months ago, I wrote about my optimistic long-term stance for Syngenta from an income investor's point of view and I reiterate my take on the company. Syngenta (NYSE:SYT) reported sales for the first half of 2014 which were 1% higher compared to previous year. Revenue in North America was down by 6%, but all other regions reported growth between 7 and 11% while overall volumes remained constant. Price increases could only partly offset negative currency effects, so that Syngenta's net income was down by 1% and EPS were 2% lower. Compared to its industry peers, these results are solid, particularly DuPont had a difficult first half of 2014, but also Monsanto and BASF Agricultural Solutions saw relatively weak second quarters. For the second half of the year, no big surprises can be expected for Syngenta: The outlook for Latin America remains good, but currency headwinds will prevail, so that sales growth will most likely stay low. The emerging market currency depreciation is expected to have a net effect on full year's EBITDA of $100M-$120M, however the net result will likely improve, primarily due to the non-recurrence of one time effects.

The most concerning factor for the agrochemical and the seed industries remain the low corn prices. 2014 will most likely be the second corn bumper harvest in series and the outlook has already lead to a slide in corn prices below $4/bushel for the continuous CBOT future. This situation puts tremendous pressure on corn farmers and will lead to a further reduction of corn acreages in the next growing season as well as reduced investments on crop inputs. In other words, growers will have to cut spending on seeds, agrochemicals, and fertilizers, because low corn prices do not justify it. Corn is the most important single demand driver for the seed and agrochemical industry and also the most important crop for Syngenta. However, Syngenta will in turn benefit from an increase in soybean acreages which are planted instead of corn, particularly in Latin America where the company holds a leading position.

Syngenta's stock has lost almost 8% since my first article and now trades below $72 which is 18% below its record high from early 2013. I consider prices close to $70 as attractive to initiate first positions in the stock. Unless there is no general pressure from the stock market, I do not expect to see major ups and downs for the share price during the rest of the year, however if a correction occurs and the price drops further, it would create even more interesting entry points. The start of the 2015 growing season could mark a turning point in one or the other direction, in other words we might see even lower and more appealing entry levels for long-term oriented investors or first gains might materialize. Obviously, the exchange rate developments will play an important role in any scenario. While waiting for the fruits of the investment in Syngenta to ripen, investors can meanwhile collect Syngenta's growing dividend which currently yields 2.7%, based on the recent payment of $1.9145 for the ADRs.

Disclaimer: Opinions expressed herein by the author are not an investment recommendation, any material in this article should be considered general information and not relied on as a formal investment recommendation. Before making any investment decisions, investors should also use other sources of information, draw their own conclusions, and consider seeking advice from a broker or financial advisor.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.