Monsanto is ripe for a pull back to 100

Monsanto is in the news after an initial Bloomberg report that Bayer AG, the German pharmaceutical giant was considering a takeover of the bio tech company which is well known for its GMO (genetically modified) seeds and agricultural products. The takeover bid was for $62 billion and was unsolicited. Under the terms, Bayer approached Monsanto for a deal which includes an offer of $122 a share, which is at a 3% premium.

While the offer was made on Monday, Monsanto rejected the bid. The company said that the offer from Bayer AG was inadequate but said that it was open to continue the conversation. In a statement, Monsanto CEO Hugh Grant said “We believe in the substantial benefits an integrated strategy could provide to growers and broader society, and we have long respected Bayer’s business. However, the current proposal significantly undervalues our company and also does not adequately address or provide reassurance for some of the potential financing and regulatory execution risks related to the acquisition.”

When the news first broke, shares of Monsanto surged 6.82% by Monday’s close. However, when Monsanto did initially make it public about the approach on May 18th, prices embarked on a bullish rally.

Analysts rate Monsanto a ‘Strong Buy’ with a 12-month target of 112. Shares are trading at 109.30 at the time of writing.

The price/earnings for the year in Monsanto stands at 23.35, above the industry average of 19.10.

While in the middle of the negotiations, Monsanto was upgraded to buy by Jeffries. Among other things, the firm noted that favorable weather conditions should prove to be bullish for the stock price into 2017 – 2020.

One of the main reasons for the acquisition by Bayer is the fact that as a Life sciences company, the business well compliments that of Monsanto which has a strong presence in the Americas.

Monsanto – Technical Analysis

We get a better view of the price action in Monsanto on the weekly chart. Price action is currently trading near a major resistance level of 116 – 112 region. A weekly or a daily bearish reversal in this resistance zone could start to see a decline in prices in the near term. To the downside, freshly broken resistance at 100 is likely to be tested to the downside for support.

Also acting in the favor of the downside is the fact that price action is capped by a confluence of a rising trend line that is now acting as resistance, the horizontal resistance at 116 – 112 and the upper median line from the rising (dotted) median line tool. Not to forget, the fact that there is a strong bearish divergence, all point to a downside in Monsanto.

Monsanto (NYSE: MON) – Price at resistance
Monsanto (NYSE: MON) – Price at resistance

Selling Monsanto near the current resistance level, subject to a bearish reversal pattern could signal a potential set up for a move down to the 100. Alternatively, looking to buy off the 100 support, based on the evolving narrative could offer a discount to the current value. In the near term, price action in Monsanto is likely to be determined by the ongoing negotiations with Bayer.

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