The market isn't valuing Corteva (CTVA -0.69%) at a premium for its current business performance. Rather, the market believes that over the next few years, the seed and crop protection company will perform excellently, thus assigning premium multiples to its stock. Here's why Corteva is on a long-term growth trajectory. 

A look at Corteva's current valuations

I'll start by looking at Corteva's current valuations, moving to what they could look like in a few years, and then discussing how the company can hit its earnings targets. 

As the charts below indicate, the stock doesn't look cheap today. 

CTVA Price to Free Cash Flow Chart
Data by YCharts.

However, it's future profitability that counts in investing. Based on Wall Street analyst consensus estimates, Corteva is set to significantly improve its earnings and free cash flow (FCF) in the coming years. In the table below, I've outlined the key metrics to 2025 in line with management's guidance at the investor day event in September. 

As such, the case for buying the stock rests on its earnings before interest, taxation, depreciation, and amortization (EBITDA). Corteva's EBITDA margin should meaningfully expand by 2025, leading to tremendous free cash flow (FCF) growth.

Based on these estimates, Corteva's current market cap of $44.3 billion, and its enterprise value (EV, or market cap plus net debt) of $42.2 billion, the stock currently trades at an EV/EBITDA multiple of 9.8 times, based on its 2025 EBITDA estimates. From a free cash flow standpoint, the stock trades at 17 times its 2025 FCF estimates. These are reasonable valuations for a company with excellent long-term growth prospects. 

Metric

2021

2022

2023 Est.

2024 Est.

2025 Est.

Sales

$15.7 billion

$17.5 billion 

$18.4 billion 

$19.2 billion 

$19.9 billion

EBITDA

$2.6 billion 

$3.2 billion 

$3.6 billion 

$3.9 billion

$4.32 billion

Free cash flow

$2.2 billion

$0.3 billion

$1.5 billion

$2.1 billion

$2.6 billion

Data source: marketscreener.com.  

Corteva's recent history

To be clear, the analyst consensus of $4.3 billion in EBITDA in 2025 is below management's target of $4.4 billion. Still, whichever way you cut it, both figures imply a double-digit annual earnings growth over the medium term.

Corteva was created out of the DowDuPont merger and subsequent breakup. It's a leading seed and crop protection company that hasn't always delivered on its potential. Indeed, the company was shaken up by activist investor Starboard Value, with three of its choices appointed as directors in 2021. In addition, a new CEO, Chuck Magro, was appointed in November of that year. Since then, he's laid out plans to improve earnings significantly. 

Three reasons why Corteva can hit its targets 

First, in line with Starboard's criticisms on profit margins and focus, management plans to generate $400 million in annual savings by 2025 and simplify its business by refocusing on its core products and its 20 "must-win" countries.

Second, management intends to ramp up its research and development spending from around 7% of sales at the end of 2022 to 8%, generating sales growth through developing differentiated products. With new product sales in its crop protection segment up by 30% in 2022 along with Corteva's heritage as part of two world-class chemicals companies, the company is giving investors confidence.

Third, Corteva is expanding sales of products under its technology. This action means it can reduce net royalty payments by $250 million by 2025, with the intent to be royalty neutral by the end of the decade. Corteva is making significant progress with its Enlist system. Enlist soybeans now command a 45% share of U.S. soybean acreage, up from around 35% in 2021. Management plans for a mid-fifties percentage in 2023, and 60% by 2025. 

A stock to buy

Corteva is making these changes under a favorable backdrop for agriculture. According to the U.S. Department of Agriculture (USDA), farm cash receipts from crops are set to have another strong year on the back of solid crop prices in things like soybeans, corn, and cotton.

U.S. Farm Cash Receipts from Crops

Data source: USDA.

All told, Corteva's growth story to 2025 is impressive enough. By then, the company should be well on its way to reducing net royalty payments and generating margin expansion from the strategic changes to its business. Meanwhile, introducing new products and growing sales of seeds and crop protection systems under its technology promises revenue growth for many years.