Thursday Losers: Monsanto, Rambus and Education Management

Among the biggest losers in Thursday’s early trading are Monsanto (NYSE: MON), Rambus (Nasdaq: RMBS) and Education Management (Nasdaq: EDMC).

Top Percentage Losers — Thursday, May 27, 2010
Company Name (Ticker) Intra-Day Price Intra-Day
% Loss
52-Week High 52-Week Low
Monsanto (NYSE: MON)
$48.24 -8.2% $87.40 $48.25
Rambus (Nasdaq: RMBS)
$22.89 -8.0% $26.00 $12.27
Education Management (NYSE: EDMC)
$20.89 9.0% $26.98 $17.10

*Table includes companies with minimum market capitalizations of $200 million and three month trading volumes of at least 100,000 shares. All percentage returns are listed as of 11:27AM Eastern Standard Time. Click on ticker symbols for up-to-the-minute price quotes and percentage gain data.

Monsanto Plunges to New Lows

Shares of Monsanto (NYSE: MON) are off -8% this morning and are now touching three-year lows as the company cut its 2010 forecast and announced a revised pricing strategy on a key product. The company’s stock has been falling sharply since the start of the year for a pair of reasons. First, the company’s focus on tightly controlling how farmers can use its genetically-modified seeds has come under federal scrutiny and created a backlash among farmers. Second, Roundup, the company’s herbicide, has seen steady market share losses from generic products made in China.
This morning’s sell-off focuses on Roundup. The company had been seemingly oblivious to rising generic competition, and failed to reduce pricing fast enough to protect market share. Now, management has decided to cut prices for Roundup, which will lead to sharply lower profits. Fiscal (August) 2010 profits will likely be a little more than half the fiscal 2009 earnings. This is the second time in six weeks that management has sharply lowered its outlook. One of the reasons that shares of Monsanto performed so well from 2005 to 2008 is that forecasts were perpetually raised. Now, management must prove that this new lower forecast represents a baseline that will eventually be raised.

Yet it’s worth noting that Monsanto has become one of the most innovative agricultural firms in the world, regularly developing cutting-edge products that boost farmers’ yields. That has helped farmers make more money while also enabling the company to garner strong prices and firm margins. The company still spends more than $1 billion a year in R&D, and over time, Monsanto is likely to move back on to the cutting edge.

Action to Take –> Even with the sell-off, there is no hurry to buy shares now. Management’s lowered outlook likely represents a bottom, but it will be at least several quarters – if not more – before management can once again talk about sales and profit growth in future years. And shares are simply not cheap enough yet on a price-to-earnings ratio (P/E) basis to attract value investors. This is a name to watch, not to buy.

Legal Delays Hit Rambus

Shares of memory chip maker Rambus (Nasdaq: RMBS) are off -8% today on word that the International Trade Commission (ITC) will delay a decision on whether Nvidia (Nasdaq: NVDA) and others violated Rambus’ patents. Rambus, along with Qualcomm (Nasdaq: QCOM), has made its name as a collector of royalties for the massive base of intellectual property it has developed. Before the delay, shares of Rambus had been near a multi-year high on expectations of an imminent positive resolution to the matter. Yet this is more of a delay then a real setback, as the ITC simply wants all parties to weigh in on how a royalty deal between Samsung and Rambus will affect the rest of the industry.

Rambus has always been a difficult stock to value. Much of its profits come from royalties, and the timing of agreements creates very lumpy revenue and profit results. The company was especially active in securing new agreements in the middle of the last decade, which pushed shares above $40 in 2006. Royalty revenue slumped in more recent years, and shares now trade closer to $25.

Action to Take –> Over the near-term, shares should rebound and push past the $30 mark, perhaps closer to $35. That’s because the company is expected to imminently win a patent case over memory makers Hynix and Micron Semiconductor (NYSE: MU), which could net the company close to $500 million in an upfront license, and then more revenue from ongoing royalties. After that, perhaps by the end of July, the company is still expected to prevail in the case that was just delayed by the ITC. That could net the company a similar windfall. 

Weakness in Education Stocks

Though more than 90% of stocks are trading up this morning, publicly-traded for-profit educational institutions are all moving down a bit. Education Management Corp. (NYSE: EDMC) is off -8%, National American University (Nasdaq: NAUH) is down -7%, while DeVry (NYSE: DV) and ITT Educational (NYSE: ESI) are off nearly -3%.

The entire group has been under pressure in recent quarters on concerns about high tuition costs and the very high amounts of debt being taken on by students. As the PBS show Frontline noted earlier this month, student loan delinquencies at these institutions are running at fairly high rates. This comes on the heels of recent editorials that question whether a college degree is suitable or even necessary for a wide swath of the work force.

Action to Take –> Cost pressures are starting to pinch at many colleges and universities, especially in the face of unpaid loans. This whole sector may head even lower before any rebound.