Shares in agriscience company Corteva (CTVA -2.01%) are up 42% so far this year, compared to a 16% decline in the S&P 500 index. The move speaks to the benefit of investing in a non-economically correlated sector like agriculture. It also reflects how well the company is doing in establishing sales of its new products as it marches toward significant profit margin expansion by 2025. It all adds up to make Corteva a compelling investment option in a difficult stock market.
The seed and crop protection company was created out of the Dow-DuPont merger in 2017 and separated as a stand-alone company in 2019. For reference, it generates the bulk of its seed revenue from corn, and to a lesser extent, soybeans, with other oil seeds also contributing. Its crop protection products are primarily herbicides, with significant contributions from insecticides and fungicides.
Seeds and crop protection are complementary products, mainly when sold as part of a system whereby the seeds are resistant to herbicides which Corteva may also sell. More on this in a moment.
The investment case for Corteva stock
The key to the investment case for the stock is management's plan to expand earnings before interest, taxation, depreciation, and amortization (EBITDA) margin to between 21% and 23% by 2025. Management outlined the plan at its investor day presentation in mid-September while forecasting an EBITDA margin of 17.4% for 2022.
Since then, Corteva reported a robust set of third-quarter results, which gave management cause to maintain its full-year revenue forecast at $17.2 billion to $17.5 billion while raising its EBITDA projection to between $3 billion and $3.1 billion, from a previous estimate of $2.95 billion to $3.1 billion. Some simple math implies an EBITDA margin of 17.1% to 18% -- the midpoint of which (17.55%) is slightly above the investor day presentation's estimate of 17.4%.
How Corteva plans to raise margin
The outlook upgrade gives investors more confidence in management's ability to hit its 2025 targets. However, the details and color around the company's operational performance are even more critical. There are five key elements to the plan, and the recent results show the company is making progress on all of them.
- Management plans to simplify its portfolio and focus on its core markets.
- Lowering net royalties (by $250 million to 2025) paid to other companies by increasing sales of products under its technology, such as Enlist soybeans and herbicide.
- Increasing profit margin by selling higher-margin differentiated products.
- Cutting selling, general, and administrative (SG&A) costs by $400 million by 2023 by improving operations.
- Investing in growth via research & development.
On top of the plan to exit 35 countries and cut the workforce by 5%, which was outlined in September, management announced further tweaks. These include discontinuing U.S. sunflower seed production for the European market with the company pulling out of Russia and by cutting production of other products in the U.S.
Enlist soybean sales continue to surge (Enlist herbicide sales doubled in the third quarter from the third quarter of 2021), and management expects Enlist to penetrate a mid-50% share of the U.S. soybean market -- up from at least 45% in 2022 and approaching management's medium-term target of 60%.
As such, Chief Executive Officer Chuck Magro expects Corteva to cut its royalty payments by $100 million in 2023. The company is well on its way to the $250 million target by 2025.
As for cost cuts, Corteva has delivered $175 million in productivity savings so far in 2022, helping to offset a whopping $850 million in cost headwinds coming from higher raw material and logistics inflation.
A stock to buy?
All told, while Corteva faces persistent headwinds going into 2023, its mix of cost savings, royalty payment costs, productivity initiatives, and growing sales of new products means its profit margin is expanding. Given further positive momentum, Corteva looks likely to hit its targets, making the stock attractive for investors.