Corteva Earnings: Inventory Destocking Weighs on Near-Term Profits

Corteva CTVA reported high-level third-quarter results that were below the low end of guidance. Management also issued revised 2023 guidance with a lower outlook due to continued inventory destocking leading to lower sales volumes, particularly in Brazil, than the company had previously forecast. We have updated our model for a lower near-term outlook, and we have reduced our Corteva fair value estimate to $67 per share from $70. Our wide moat rating is unchanged.

Corteva shares were down 5% in premarket trading at the time of writing as the market reacted negatively to management’s 2023 guidance cut. Admittedly, the rapid pace of inventory destocking that has occurred in crop chemicals this year caught us by surprise, including the continued strong destocking that occurred in the third quarter in Brazil. However, Latin America, where Brazil is the largest market, accounted for 16% of Corteva sales in 2022. Accordingly, Corteva should be less affected than peers such as FMC, who have greater exposure to Brazil.

Regardless, we view destocking as a near-term issue. We see no changes to Corteva’s competitive positioning or our long-term outlook that premium crop chemicals producers should see above-market growth in the coming years as farmers will continue to pay up for premium products that result in better pest management and higher crop yields.

Accordingly, we view Corteva shares as significantly undervalued, with the stock trading at over 30% below our updated fair value estimate. We think the bad news is priced into the stock as shares trade below our downside scenario valuation, which produces a fair value estimate of $40 per share. In our downside scenario, we assume little revenue growth over our five-year forecast and assume lower long-term profits and margins as profits do not recover to 2022 levels. As such, for long-term investors, we view the current price as an attractive entry point for Corteva, one of the highest-quality ag input companies we cover.