This Stock Crushes the Market in 2022 (and Has More Room to Maneuver)
Shares in an agroscience company Corteva (VAT 3.03%) are up 42% since the start of the year, compared to a decline of 16% S&P500 index. This decision demonstrates the advantage of investing in an economically uncorrelated sector such as agriculture. It also reflects the company’s ability to establish sales of its new products as it moves towards significantly increasing its profit margin by 2025. All of this helps make Corteva a compelling investment option in a tough stock market.
The seed and crop protection company was formed as a result of the Dow-DuPont merger in 2017 and spun off as a standalone business in 2019. For reference, it generates the bulk of its seed revenue from the corn and, to a lesser extent, soybeans, with other oilseeds also contributing. Its crop protection products are primarily herbicides, with significant contributions from insecticides and fungicides.
Seed and crop protection are complementary products, primarily when sold as part of a seed herbicide resistance system that Corteva may also market. More on that in a moment.
The Investment Case for Corteva Stock
Key to the investment case for the stock is management’s plan to increase earnings before interest, taxes, depreciation and amortization (EBITDA) margin to between 21% and 23% by 2025. Management presented the plan when presented at Investor Day in mid-2025. September while forecasting an EBITDA margin of 17.4% for 2022.
Since then, Corteva has released a strong set of third-quarter results, giving management reason to maintain its full-year revenue guidance of $17.2 billion to $17.5 billion, while increasing its EBITDA projection between $3 billion and $3.1 billion, down from a previous estimate of $2.95 billion to $3.1 billion. A few simple calculations imply an EBITDA margin of 17.1% to 18% – the midpoint of which (17.55%) is slightly above the 17.4% estimate from the Investor Day presentation.
How Corteva plans to increase its margin
The outlook update gives investors more confidence in management’s ability to meet its 2025 targets. However, the details and color surrounding the company’s operating performance are even more critical. The plan has five key elements, and recent results show the company is making progress on all of them.
- Management plans to simplify its portfolio and focus on its core markets.
- Reduce net royalties ($250 million through 2025) paid to other companies by increasing sales of products using its technology, such as soybeans and the herbicide Enlist.
- Increase profit margin by selling higher margin differentiated products.
- Reduce selling, general and administrative (SG&A) costs by $400 million by 2023 by improving operations.
- Invest in growth through research and development.
In addition to the plan to exit 35 countries and reduce the workforce by 5%, announced in September, management announced further changes. These include the cessation of US production of sunflower seeds for the European market with the withdrawal of the company from Russia and the reduction of production of other products in the United States.
Enlist soybean sales continue to increase (Enlist herbicide sales doubled in Q3 compared to Q3 2021), and management expects Enlist to enter approximately 50% market share soybean growth, up from at least 45% in 2022 and approaching management’s medium-term goal of 60%.
As such, CEO Chuck Magro expects Corteva to cut its royalty payments by $100 million in 2023. The company is on track to hit the $250 million goal by 2025. .
As for cost reductions, Corteva has realized $175 million in productivity savings so far in 2022, helping to offset a whopping $850 million in cost headwinds from increased inflation of raw materials and logistics.
A stock to buy?
All in all, as Corteva faces continued headwinds through 2023, its combination of cost savings, royalty payment costs, productivity initiatives and growing new product sales means its profit margin increase. Given continued positive momentum, Corteva looks likely to meet its targets, making the stock attractive to investors.
Lee Samaha has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.