Corteva: As Bullish As Ever On This Quality Company (NYSE:CTVA)

Investment Summary

Corteva, Inc. (NYSE:CTVA) had another solid quarter displaying margin expansion as the market fundamentals remained very positive for the company. I have covered the company previously and remain bullish on its outlook. I am sticking with this view and I think CTVA offers investors a fantastic way to get exposure to the fertilizers and agricultural industry with a company that is trading at what I still think is a good price point.

The need to secure food sources and have reliable ones as well is crucial and CTVA can help with that given the products and services they have. The company has a very shareholder-friendly approach where a significant portion of the FCF is diverted to shareholders. For 2023 for example, about $500 million are going to be used for buybacks. With a market cap of $35 billion, that’s a reduction of around 1.5% give or take. That together with a dividend increase of 7% makes me continue to be bullish on the company and maintain my buy rating.

Market Overview

CTVA has managed to grow very well in the space in which it operates. Not that long ago I covered a similar company called Nutrien Ltd. (NTR) which had a dismal quarter as they misjudged the pricing environment poorly and revised their guidance downwards. With CTVA it seems you are getting far more stability and that is worth the premium it’s trading at in comparison to the sector right now in my view.

CTVA noted in their last quarter the demand is record-setting for grain and oilseeds which are pushing up demand for CTVA products too as rising prices and yields at those levels only grow. 2023 is set to be a strong year for net farm income, which should incentivize a lot of people into building up stocks of products and secure plans and expansions for the coming year. AI has been in the news constantly for the last few years, especially last few months. But there are more and more adoptions of this in the agricultural space which should help grow net farm income further as better margins are expected from it. A streamlined operating model for farms will help make expansion and orders for CTVA more fluent and hopefully more predictable too.

On a more global scale, CTVA remains in a strong position as Latin America has grown closer to pre-2022 averages in terms of orders. The company even managed to gather up a stronger market share in the 2022 and 2023 seasons in Latin America, which goes to show the strength of the business and brand. If prices become more positive, I think we are likely to see CTVA further build up its margins and averaging a solid 7 – 8% bottom line growth is achievable in my opinion if they continue to divert as much capital to buy back shares for example.

Quarterly Result

Looking broadly at the first half of 2023 the company was able to grow sales at a 1% YoY growth rate, which isn’t incredible by any standards. But given that last year the pricing environment was out of the ordinary, meaning the war in Ukraine caused prices of many commodities to skyrocket, so did a lot of the fertilizers used for them, which resulted in CTVA growing its EPS at a fantastic rate, the slight consolidation is not worrying. Weather-related impacts have largely impacted revenues as well, but stronger martyr demand for seed has been helping offset a good amount of this nonetheless.

Going into the coming quarters, I don’t think it’s impossible we continue to see decent sequential sales growth. But perhaps where I would place the largest amount of attention would be margin retention for the company instead. If CTVA can continue expanding the bottom line, then the buy case is only amplified and investors could expect a market-beating ROI paired with a good dividend yield too.

Risks

Within the agricultural sector, Corteva faces a range of potential risks that could impact its performance and bottom line. One of these risks lies in the volatility of commodity prices. Fluctuations in the prices of key agricultural commodities, such as crops and grains, can directly impact farmer profitability and their willingness to invest in products and solutions offered by Corteva. Sudden shifts in these prices could lead to changing demand patterns and affect the company’s revenue streams.

Another notable risk is the ever-evolving regulatory landscape surrounding genetically modified organisms (GMOs) and pesticide usage. Changes in regulations can affect the approval process for products, limit market access, or impose stricter safety standards. Adapting to these regulations while ensuring compliance can be a complex and resource-intensive process, potentially impacting Corteva’s product development timelines and costs.

Financials

On the asset side of the balance sheet, the company has continued to make strong progress as the cash position for example has been growing by $162 million YoY and sits at nearly $2.6 billion. Enough to wipe out the entire long-term debts for the company, even if they have almost doubled since last year to $2.2 billion.

Inventory levels have also been increasing for the company which tells me they are gearing up for stronger demand and ensuring the necessary supplies to satisfy demand. As for the ROA of the company, they have done a good job and right now is at over 2% which is far above their 5-year average of 0.12%.

Valuation & Wrap Up

I have covered CTVA a fair bit already but with the recent report from the company I am continuing to be bullish on the business prospects and staying by my buy rating for the company. Looking deeper at the valuation of the company, I think that the company is still looking appealing despite the slight premium to the sector based on earnings. A p/e of 17 may seem expensive when you have similar companies like Nutrien Ltd. (NTR) trading at 12 in the same industry. But what CTVA has managed to do well is continue to grow and the estimates are that by 2028 the company will achieve an EPS of over $5 at least, which is an almost 100% increase from today’s numbers. I think that carries enough weight that CTVA can be considered a buy still. Looking at NTR, we have a prime example of a company that has been struggling to make the most of the current market situation. They have been revising their guidance heavily, whilst CTVA remains confident. That makes me confident it’s the better option despite the higher p/e it currently trades at in comparison.

The world needs to secure a stable food system and CTVA offers products that help ensure strong yields and the valuation of the business is still very appealing in my opinion. The company has made it clear that it intends to divert a significant amount of FCF for investors in the shape of dividends and buybacks, and this is only adding to my bullish thesis about the long-term for CTVA. Reiterating my buy for the company.