There aren't many non-energy companies that raised full-year earnings guidance in their recent earnings reports, but agriscience company Corteva (CTVA 0.29%) did. The company's earnings confirmed Corteva's progress on its strategic objectives, and investors can look forward to multiyear margin and profit expansion from the company. Here's why Corteva remains an attractive stock for long-term investors.
NYSE: CTVA
Key Data Points
The investment case for Corteva stock
There are three key reasons to buy Corteva:
- The agriculture sector offers a relatively non-economically aligned way to invest in the market -- a plus in an uncertain economic environment.
- Corteva has significant potential to increase margin by cutting costs.
- The company has a long-term margin-expansion opportunity by reducing ramping sales of products under its own technology patents, therefore reducing royalty payments to other companies.
The first point is relatively easy to understand. Ultimately, spending on agriculture follows the underlying price of the commodities. If they rise, farmers tend to make more money and are more willing to spend on equipment or, in Corteva's case, lay crops and invest in seeds and crop-protection products. Indeed, stocks in the agriculture sector were also sold off in the recent decline this year as investors piled out of commodity stocks after interest rates started rising and economic indicators worsened. However, it's also true that the underlying crop commodities (corn, wheat, soybean, rice, etc.) are still at levels not seen since 2014 -- a period of historically high crop commodity prices.
While some of the speculative fervor has undoubtedly come out of the commodities market, historical data suggests that crop commodities do OK in recessionary periods, or at least they don't move in lockstep with global growth rates.
Data by YCharts.
Productivity measures
Corteva's profit margin and organizational structure have recently been a bone of contention among investors. The company was created out of the Dow-DuPont merger and then breakup, and it has some world-class assets within it. However, its margin performance hasn't lived up to expectations following the merger, and criticisms were leveled at former CEO Jim Collins by activist investor Starboard Value. However, Collins retired in 2021, with industry veteran Chuck Magro taking over in November 2021. Consequently, Corteva has appointed three experienced Starboard-backed directors to its board.
As part of its aim to increase margin, management undertook a strategic portfolio review and is making ongoing restructuring actions. For example, $130 million was taken out of costs in the first half due to productivity actions.
Furthermore, management plans to reduce exposure to less-attractive geographic markets and product lines while simplifying its organizational structure -- more details are forthcoming on its investor-day presentation in mid-September.
Increasing sales under its own patents
If Corteva can increase the share of its sales coming from products under its own patents, then all things being equal, it should reduce the percentage of its revenue paid in royalties. It's been a long-term aim for the company, and Corteva is starting to gain traction.
For example, consider its Enlist soybean seed and crop protection system. Corteva makes seeds resistant to crop protection (herbicides), so the latter kills weeds to improve soybean yields. Going into 2021, management expected market adoption of 30% in 2021 and achieved 35%. Fast-forward to the second quarter of 2022, and as Magro noted on the recent earnings call, "Enlist soybeans were planted on at least 45% of U.S. soybean acres in 2022. This is a remarkable feat considering this technology has only been in the market for three seasons."
In terms of reducing royalty payments, CFO Dave Anderson said, "there is a nice pickup that begins in 2023, and then we'll continue to ramp." As such, analysts have Corteva's operating margin increasing from 13.1% in 2021 to 16.8% in 2024.
A stock to buy
The ongoing margin expansion initiatives will drop down into significantly improved profits if revenue keeps growing in line with a buoyant crop commodity market. While it's tough to predict crop prices from year to year and, in turn, farmers' income and spending on seeds and crop protection, Corteva is well placed to benefit if current conditions persist. Moreover, its end market conditions have little connection with the economy at large, making Corteva an excellent option for recession-fearing investors.
