Fertilizer prices heavily rose in 2022 as a result of the war in Ukraine beginning. The country is a major supplier of several crucial commodities like wheat and corn. The country is also the top producer of sunflower meal, oil, and seed. The war disrupted the market and caused a shortage and stress around securing supplies of these. Fertilizer prices rose quickly in value as they are viewed as solid ways to secure harvest regarding these. Corteva, Inc. (NYSE:CTVA) is a major supplier of some of these products and their earnings rapidly rose in 2022 following this. The company has a market cap of over $36 billion, which makes it one of the largest in the industry. The demand is fundamentally supported by the necessity to ensure there are ample food supplies, I therefore view CTVA as a strong buy currently.
CTVA, established in 2019 following a spin-off from DowDuPont, is a prominent agricultural company based in the United States. The company is dedicated to advancing the agricultural industry through the development and distribution of crop protection solutions, high-quality seeds, and cutting-edge digital agricultural technologies. CTVA’s comprehensive portfolio encompasses a wide range of products and services aimed at enhancing crop yields, sustainability, and farm productivity.
As we know, CTVA has a leading position in the market, but there are fundamental facts in the market that will be driving future growth for the business in my opinion. One of the most notable ones is inventory concerns. Farmers are stocking up on products in the coming wake of both the start of planting and harvesting periods. This has been beneficial to CTVA and their recent report showed a strong improvement in the seed segment, raising sales by 14% in North America alone on a YoY basis.
The market continues to be very positive towards the prospects of CTVA, but I would guess that the downturn the stock price has seen comes from CTVA better being valued with the rest of the sector of fertilizers. CTVA is one of the largest ones in the sector and is sort of acting as a good metric for the demand. With double-digit growth in the EPS, I would assume a decent premium would be applied, and that is the case for CTVA right now. Where CTVA is making strong progress is getting new products on the market. The last earnings call had CEO Chuck Magro comment on one of the newest developments, “We are pleased to see Enlist E3 recognized by the market. This year, Enlist E3 is the number one selling soybean technology in the U.S. and we expect E3 beans to be on at least 55% of U.S. soybean acres in 2023”. Such rapid adoption of this progress speaks volumes about its reliability, I think. It’s a significant tailwind for CTVA and should support fundamental growth to the earnings potential.
Comparison To The Mosaic Company
On a technical basis compared to The Mosaic Company (MOS), I think that CTVA looks quite decent. Over the last 12 months, the share price has been far more volatile for MOS and ultimately has led to a higher decrease in comparison to CTVA. I think that, going forward, CTVA can be viewed as the more stable and least volatile option in the fertilizer market.
The RSI for CTVA right now hasn’t been that volatile. Right now it’s around the 40 mark and is approaching oversold in my opinion. If we see a market correction I think that CTVA could follow, but if the RSI is to reach around 30 I think a bounce back is imminent, and it could be quite significant then as well.
Looking at the multiples for MOS, I think that given the fact they are incredibly tied to the price of potash, the earnings are inherently more volatile. This quite often results in a higher discount rate against the broader sector that it operates in.
Comparing multiples of MOS to CTVA I think it’s quite clear which is the discounted company right now. However, I want to return to the fact that what you get with CTVA is more stable earnings and revenues. With MOS, the bottom line for example has been quite volatile. 2022 net income was $3.5 billion, and the TTM has sunk to $2.1 billion instead. With CTVA, the results have been far less volatile, going from $1.1 billion to $920 million in the last 12 months. When it comes to making a decision, I think for the less risky investor, CTVA makes the most sense. For those more risk-averse, MOS could offer a lot of opportunity.
Assessing The Value
With CTVA, you are right now paying a premium against the sector, but I think this is fair given that you are getting a dividend payer and a business also buying back large amounts of shares. In 2023 the target is to buy shares worth $500 million.
The outlook from the company suggests another year of growth. The guidance has been revised slightly downward, which comes from some less favorable volumes in North America and Latin America. Operating EBITDA is to yield an 11% growth rate as margins improve by 130bps.
As we saw earlier on with the estimates, CTVA is to grow the bottom line by double digits at least for the coming years. This is also driven by share buybacks. Even if the company trades at an earnings premium to the sector, for example, CTVA still exhibits a lot of value in the long term. There may be some years of price consolidation, but I think CTVA is a decade-long play. With the market position they already have gathered up, it’s one of the best bets on the global necessity to secure strong and reliable food production.
In the realm of the agricultural sector, CTVA is exposed to a spectrum of potential risks that loom over its performance and financial outcomes. Among these risks, the volatility of commodity prices stands out as a prominent concern. The agricultural industry is highly sensitive to price fluctuations in key commodities, including various crops and grains. These price oscillations have a direct bearing on the profitability of farmers, which in turn influences their decisions to invest in the products and solutions offered by CTVA.
Some of the attractiveness of CTVA hinges on its ability to deliver robust returns on capital, which can take the form of share buybacks or dividend payments. However, it’s important to consider that these capital returns may be influenced by pricing conditions in the agricultural sector. In less favorable pricing environments, CTVA’s capacity to offer substantial capital returns could diminish. I think that as prices have been less favorable for CTVA they have still managed to make it worthwhile for investors. The last quarter offered a 7% raise to the dividend and is expecting to buy back shares worth $500 million.
CTVA has had its price dive lower in the last 12 months, down around 14%. The market of fertilizers has had its joyride the last few years as the war in Ukraine caused the prices to increase strongly. Since then, the market is returning to a more status quo. Volume is slightly lower than anticipated in some regions, but that is just the nature of the business. Each year doesn’t have the same weather conditions, and the only thing companies like CTVA can do is ensure they have solid margins through the cycles. The bottom line is trending upwards, and I think CTVA is one of the best ways to get exposure to the fertilizer industry.