Corteva Earnings: Strong Seed Pricing Partially Offset by Lower Crop Protection Volume

We maintain our $70 fair value estimate for Corteva CTVA after updating our model to incorporate the company’s second-quarter results. Our wide moat rating is unchanged. We view the shares as currently undervalued, trading in 4-star territory at a roughly 20% discount to our fair value estimate.

The shares were up slightly at the time of writing despite a small guidance cut; management reduced its outlook due to lower crop protection volume. While the lower volume will affect profits in the near term, we see little impact on Corteva’s medium- or long-term outlook. As the company commercializes its research and development pipeline of premium seeds and crop protection products, this should drive average annual revenue growth of 4% over our five-year explicit forecast, with operating EBITDA margin expansion to 23% in 2027 from 18.5% in 2022.

In the near term, Corteva will likely see a divergence between the results of its seed and crop protection businesses as falling crop prices will have a different effect on the two crop inputs. In seeds, farmers will ultimately still have to plant and will likely still pay up for premium seeds as they boost crop yields. We expect the seed business will continue to benefit from the shift to premium prices and reduced royalties as Corteva shifts its genetically modified soybean portfolio to its proprietary Enlist seeds.

In crop protection, we expect lower volume throughout the remainder of 2023 and into 2024. Farmers should still pay up for premium crop protection products. However, in a lower-price environment, farmers are more likely to cut back on the use of additional generic products and may reduce the number of times they apply a product to their fields, resulting in lower volume. Regardless, over the long term, Corteva’s portfolio shift toward premium products should drive profit growth and margin expansion over the next several years.