Corteva

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Corteva is a global leader in developing and supplying seed and crop protection products, aiming to enhance agricultural productivity and sustainability.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Corteva is a global, pure-play agriculture company. Its operations are divided into two segments: Seed and Crop Protection. The Seed segment is focused on developing and selling advanced seeds, traits, and genetics for crops such as corn, soybean, and cotton. The Crop Protection segment develops and sells products that include herbicides, insecticides, fungicides, and seed treatments, to help farmers manage pests and diseases, while increasing yields and reducing crop loss. The company operates in approximately 140 countries and has a large market presence in the US, Brazil, and Europe, among other regions. Corteva’s revenues are largely derived from these two segments, with seed sales often more heavily weighted towards the first half of the year in the Northern Hemisphere and crop protection sales weighted towards the planting and growing seasons. The company has been working to enhance its direct-to-grower distribution model, and to optimize pricing and market strategies. Also, they are investing in R&D to create innovative technologies and new products. The financial performance, especially profitability, of Corteva is determined significantly by commodity prices, weather patterns, as well as management’s decisions.

Corteva’s revenues are concentrated in North America, Latin America, and the Europe, Middle East, and Africa regions, highlighting its global presence.

Competitive Landscape

The agricultural industry is characterized by intense competition, from large established players as well as from emerging competitors. A few of the main competitors include Bayer, BASF, Syngenta, and Nutrien. The companies compete based on multiple factors such as product performance, quality of research and development, and access to markets. In the seed market, competition is focused on developing superior genetics and traits that can withstand pests, diseases, and environmental stresses. In crop protection, they compete on efficacy, safety, and cost-effectiveness of products. The agricultural industry is also subject to several regulatory factors, including laws relating to product registration, pricing, as well as environmental rules. Corteva maintains a differentiated position by leveraging its scientific capabilities and its focus on the following:

R&D Capabilities: Corteva invests heavily into R&D, which allows it to produce novel and effective products for farmers.
Brand Power: Corteva has created strong brands with high recognition in the agricultural sector that can attract and retain a strong customer base.
Diversified Portfolio: Corteva’s large portfolio of seeds and crop protection products allows it to serve a wider range of customer needs, thus reducing its dependence on certain markets or products.
Customer Relationships Corteva has been investing in its direct distribution and digital channels in order to reach its end consumers and develop stronger client relationships

Financials

Corteva’s most recent financials from the report, for the nine months ended September 30th, 2023, shows a net sales of $11.3 billion. This represented an increase of 2.1%, after accounting for the impact of currency translation, driven by increased prices and volume in Crop Protection while the Seed segment was down due to reduced demand in North America and Europe, though offset by higher volume in Latin America. Also, operating income is up to $1.9 billion compared to $1.2 billion for the same nine month period of 2022. This is mostly driven by higher pricing which was implemented for crop protection product and better management of operating costs in the Seed segment. The gross profit margin decreased slightly due to an increase in cost of goods sold per unit (from a combined affect from raw material inflation, higher production expenses, and currency effects), which was only slightly offset by an increase in selling prices in the Crop Protection and Seed segments. The company had $1.2 billion in long term debt, but $2.3 billion in cash and short term investments, meaning they have good liquidity and can pay off their debt if they choose. The company has recently been repurchasing a decent amount of their own stock, especially their preferred shares, this could be because they believe their stock is undervalued or just a method for decreasing dilution.

A deeper analysis of their cash flow statements shows that they are generating a large amount of positive cash flow from operations, meaning they have a good handle on their core business.

It also must be noted that the financials I’ve outlined above are unaudited and for the nine months ended September 30, 2023. The annual report is due at the end of 2024 and that will provide a clearer view on their financial performance.

Moat Assessment

Corteva exhibits some characteristics of an economic moat, but it isn’t as strong as other companies in their industry.

Intangible Assets: Corteva possesses a portfolio of popular and well established brands, with notable market recognition and customer trust. The most recognized include DuPont Pioneer, Mycogen, and Pioneer, which account for a substantial amount of their seed sales. Brand names such as Corteva Agriscience, Coragen, and Isoclast also hold value for their crop protection business. However, given the level of competition, these brand names do not enable them to have consistent pricing power over their competitors. They have very high prices on seed and crop protection products, which creates high barriers to entry, but also makes it easier for other well-established players to sell at similar prices and compete against them.
Switching Costs: Farmers rely heavily on Corteva’s products due to performance requirements, regulatory hurdles, and the long development cycle for new agricultural products. However, they can still switch between different suppliers and companies for seed and crop protection relatively easily. But doing that is more challenging than other industries, like software or finance due to the inherent costs of switching suppliers in a short period.
Cost Advantages: Corteva has a solid history of scale-based production of crop protection and seed products that creates economies of scale in production and research. And they have a global supply chain with various plants located all over the world to achieve lower production costs and access many local markets. However, these cost advantages are not entirely unique to them, because many of their other major competitors in the sector also have robust production and supply chains.
Network Effects: Corteva does not have network effects, which they acknowledge themselves. A network effect will mean that their product or service will become more valuable the more people who use it. Which is why the company instead focuses on developing relationships to create brand loyalty. However, such loyalty can falter if there is a better performing option at a similar price available in the market.

Moat Rating: Based on the analysis, Corteva’s moat is deemed as 3 out of 5. There is a competitive advantage in place, but the reliance on strong brands and scale economies means it is vulnerable to competition from others in the industry.

Risks to the Moat and Business Resilience

Several potential risks could threaten Corteva’s moat and business model. A few of the major risk factors include:

Commodity Prices: The agricultural industry is subject to fluctuations in commodity prices, which directly impact the demand and profitability for Corteva’s products. A sharp decline in crop prices can directly impact sales as farmers will buy less inputs if they are unsure about profitability.
Technological Disruption: The rapid development of new technologies and advancements in the agricultural industry could easily render their products obsolete, causing loss of market share and revenue. Also, as more sustainable farming practices gain traction (such as regenerative agriculture) and a greater emphasis is put on biologicals, Corteva might lose its current advantages unless they can adapt to these trends quickly and efficiently.
Regulation: The agricultural industry is highly regulated and is sensitive to policy changes on the international level. Any change to environmental regulations could negatively impact their products and practices, and it can also limit their ability to sell certain products or to expand their operation in key markets. Also, policies that affect agriculture directly, such as subsidies for certain crops, can lead to shifting demand and have a substantial impact on sales.
Supply Chain Disruptions: Any major issue with the global supply chain could reduce their ability to manufacture and deliver its products, hurting sales and production as a whole.
Intellectual Property Challenges: If there is any type of challenge to any of their patents, this could open up competition to cheaper generics that could seriously impact their profitability. Also, if a strong competitor, through R&D, manages to produce a similar or better product than theirs, they could lose a large part of their competitive advantage.
Market Consolidation: Further mergers and acquisitions from companies will further consolidate the agricultural markets. That could, in theory, make their existing moat less valuable as there would be less players competing against them in the market. This also creates consolidation and oligopoly which can potentially reduce the profit potential.

Despite these risks, Corteva has shown to have a decent level of business resilience because of a diverse portfolio of products, established global brand name, and having strong positions in essential markets.

A key factor in Corteva’s resilience is the strength of its relationships with local farmers, enabling them to gain feedback and continuously improve their products according to changing needs.

Understandability

Corteva’s business model can be a bit difficult for people without industry knowledge. The agricultural industry is often misunderstood and it takes some technical skill to fully grasp. Especially when looking into their financials and the terminology used, without a fundamental background it will be harder to digest. That being said, the business itself is relatively easy to understand, as it sells seeds and crop protection products with the core objective of improving a farm’s yield and fighting off disease and pests. Therefore, the business gets a 4 out of 5 on the understandability scale.

Balance Sheet Health

Corteva exhibits a fairly strong balance sheet. For the quarter ending September 30, 2023, they had 1.2 billion in long-term debt and $2.3 billion in cash and short-term investments, they are generating positive cash flows, and their key financial ratios (such as the debt-to-equity ratio and interest coverage ratio) are consistent with a solid company. Due to the strength of their balance sheet, they are rated as a 4 out of 5 in balance sheet health. However, they have a large contingent liability with their environmental provisions and litigation claims that must be carefully monitored.

Corteva has reduced its debt over the years, this gives them flexibility to manage its debt levels and take action during financial downturns.

Recent Concerns, Controversies, and Problems

One of the major problems is the slowdown in the seed segment across many of their key markets and also a drop in their net income in the last 9 months. This is mainly caused by market forces outside of management’s control, such as commodity prices, weather patterns, currency movements, as well as demand for crop protection products. However, management has also stated that they are not seeing any demand issues in their key markets. Their actions to counter this is to emphasize long-term revenue growth through developing superior products, while also improving efficiency and reducing costs where needed. Another issue is that their guidance had fallen short of analysts expectations which caused their shares to lose some value. The company is also heavily involved in litigation and environmental liabilities, particularly surrounding PFAS and related matters, making them one of the most important risks to monitor for their future. As they will be required to make large future payments if they continue to lose lawsuits and also if regulators clamp down more on these chemicals. As of the latest quarter, management stated that the timing and amount of cash outflows cannot be reasonably estimated, which makes future valuations difficult as it can potentially be any number. Also, Corteva and DuPont agreed on an amended agreement for some of the settlement liabilities for historical PFAS releases. Corteva will have to pay 14% of the combined liability while DuPont will have to pay the remaining 86% of it. Despite these challenges, management maintains confidence in the long-term growth prospects of the agricultural markets, as a greater population size will require a greater demand in food.