One of the major recovery stocks, even before crisis ends
We still have to eat whatever happens, and these shares may have bottomed out already.
1st April 2020 13:18
by Rodney Hobson from interactive investor
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We still have to eat whatever happens, and these shares may have bottomed out already, writes our overseas investing expert.
Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.
It has been out of the furnace and into the frying pan for agriculture specialist Corteva (NYSE:CTVA) in less than a year of existence. After the baptism of fire, life could become a lot easier long before the coronavirus crisis is over.
Corteva was formed in tortuous fashion in May 2019 from the agriculture division of DowDuPont, a conglomerate that had been built from the merger of two massive chemicals company, reorganised into three specialities then split up again. Corteva brought together the materials science division of Dow, and the specialty products division of DuPont, to form the largest purely agricultural group in the world with many of the best-known brands in the sector.
It is a leader in the development of new seeds, which generates approximately half of total company profits, and chemicals to protect crops. It operates globally, with revenue split fairly evenly between North America and the rest of the world.
An early worry after its formation was possible disruption from trade wars, particularly between the United States and China and also the escalation of tension between the US and Europe.
Food was likely to be a key factor, with China cutting back on imports from the US and President Trump and European Union leaders threatening tit-for-tat barriers.
That all seems ancient history now, although it was in full flood only last year. In the event, all parties pulled back from an all-out conflict, but the issue could re-emerge as countries rebuild their battered economies.
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Corteva should get away lightly if that happens. It produces all its seeds locally so is less vulnerable to any disruption to supply chains. The production of chemicals is more diverse but again Corteva is not over-reliant on any particular country. In any case it has 12 month’s supply of chemicals in stock.
The coronavirus outbreak should be less of a worry. US farmers did cut back last year, planting the lowest number of acres since just after the financial crisis, but they are planning to ramp up the growing of crops this year and those plans should not be scaled back heavily, if at all, in the current economic uncertainty. Increased agricultural production is good news for a company such as Corteva with a well-balanced and diverse range of seeds. Planting should also hold up well in the rest of the world. We still have to eat.
Another positive is a project to attack the dominance of Bayer (XETRA:BAYN) in the $4 billion a year US soybean seed market, beginning this year. Corteva expects its Enlist E3 seed to make up 20% of the US crop in 2020.
Demand will also hold up for chemicals to control weeds, pest and disease as farmers seek to increase yields. Corteva has launched new chemical products that should boost revenue and margins, not just in 2020 but over the coming years as innovation continues.
It has a well-established pipeline for new products and last week it announced a collaboration with AgPlenys, a subsidiary of Evogene (NASDAQ:EVGN) to tackle the spread of weed resistance to herbicides.
Source: interactive investor Past performance is not a guide to future performance
Corteva stock began trading last May at $29. It peaked at $31.63 in August, but the shares have been dragged down in the general market carnage, slumping from $31.22 on 20 February to a low of $22.50 on 19 March.
They have come off the bottom but only as far as $23.50. Some analysts reckon their underlying value is nearer to $40, which admittedly looks wildly optimistic at this point, although that level could well be reached some time next year.
Hobson’s choice: Buy Corteva up to the original level of $29. The shares look to have bottomed out and this should be among the major recovery stocks when markets eventually pick up again.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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