DNY59Investment Thesis Corteva (NYSE:CTVA) stock has lost about 8% over the last year, underperforming the S&P 500 by a margin of about 33%. Seeking AlphaAlthough the company has very solid long-term growth levers in its innovative products, strong balance sheet, and strong market position being the second largest seed company, technical analysis, its recent price and volume data indicate a bleak outlook. DorianeIn addition, its financial performance is volatile, characterized by declining top and bottom lines, reflecting the volatile nature of the agricultural sector. CTVA Q1 PresentationFurther, the stock is trading at an about 45% premium, which implies that the downside is likely to persist. Given this background, I recommend patience before investing here until the recent weak financial performance improves, and the technical indicators show bullish signals. Until then, this stock is a hold. Brief Company Overview CTVA was formed in 2019 as a spin-off from Dow Dupont. The company is a global leader in the agricultural industry offering farmers a comprehensive portfolio of crop protection, seeds, and digital solutions. Its seed products are marketed under well-known brands such as Brevet, pioneer, Hoegemeyer, and Power Plus. It covers a wide range of field crops such as corn, sunflower, and soybean, among others. Its headquarters are in Indianapolis, Indiana, USA, but it serves a global market having a presence in Europe, North America, the Middle East, Latin America, Africa, and Asia–Pacific. Below is its revenue distribution per business segment and geographical region. Market ScreenerTechnical Analysis From a technical standpoint, let us evaluate the stock movement and assess what the trend is and the potential price actions in the future. To begin with are the moving averages. Corteva’s 50-day and 100-day MAs are above the price and downward sloping, implying that the stock is currently in a bearish momentum in the short and medium terms. Market ScreenerTo support the bearish trend shown by the MAs are the RSI oscillator and the MACD. The RSI is currently at 45.7, below the neutral range of 50 and trending downwards, which means the stock has more downside before hitting the oversold region of 30 where a trend reversal is likely. Further, the MACD is at 0.5 below the signal line which is at 1.04 and diverging with the signal line, implying that the bearish trend is gaining traction and this can further be confirmed by the growing negative histogram. Market ScreenerGiven that trading volume is key in determining potential price movement, I will look at the trading volume for the stock. CTVA has an average volume of 3.19 million which is way above its current trading volume of 2.59 million which shows a declining trading volume for the stock since it is trading below its average rate. Notably, the stock has a 1-year percentage volume change of -15.76% which shows increasing selling pressure the stock is facing and this implies that the downward trajectory is likely to continue. Vector VestAbove all, the stock has a comfort index of 0.36 which is even weakening further. This means that CTVA is unable to resist severe and lengthy price declines, and therefore we are likely to experience further price declines in the future. Thus, the bearish trend is likely to persist. Vector VestBased on this analysis, this stock is in a bearish trend which is gaining momentum and likely to continue at least in the short and medium terms. Fundamental Analysis CTVA has a strong balance sheet which is very pleasing to investors. However, its financial performance has been relatively volatile, something which possesses significant investment risk. With a total debt of $4.64 billion and total equity of $25 billion, its debt-to-equity ratio is 0.19 which translates to low leverage and minimal debt risk. In addition, the company’s total assets of $43.6 billion cover its total debt by more than 9x, which speaks volumes on the company’s strong balance sheet position. In assessing its ability to cover its debt, CTVA has an interest coverage ratio of more than 12x and a trailing operating cash flow of $2.47 billion, which is adequate to cover its total debt by more than 53%. This solid interest coverage and solid positive cash flow show that the company can meet its debt obligations, and therefore it doesn’t face any default risk. This strong balance sheet gives the company a lot of financial flexibility to weather economic challenges, as well as invest in growth opportunities and return capital to shareholders. Despite its strong balance sheet, the company’s financial performance has been very unstable, as shown below. Market ScreenerTo put it in perspective, its 3-year revenue CAGR stands at 5.25% compared to a YoY growth rate of -5.1%. Above all, its trailing revenue per share currently stands at $23.78 with a steep downward trajectory. YChartsIn addition, its EPS has a 3-year CAGR of -16.29 and a YoY growth rate of -42.26% adding to its volatile and poor financial performance. This is a major risk, especially considering that EPS has a strong positive correlation with the stock price. This volatility can be explained by two major factors. The first one is the varying and declining global food commodity prices which have declined from their highs of 160.2 to 119.1 translating to low revenues from the same sales volume. FAOThe other major reason for the volatility in financial performance is the inflationary environment, which has affected the cost of doing business and resulted in soaring total operating expenses, hurting profit margins. To be precise, Corteva has seen its total operating expenses grow from $3.8 billion in 2021 to $5.3 billion in 2023 marking a growth of 39.5% compared to a revenue growth of 7% from $15.7 billion in 2021 to $16.8 billion in 2023. With inflation projected to persist and with the declining food prices shown above, it is likely that these headwinds will keep hurting the company’s financial performance in the short and medium terms before they stabilize. This adds to the seasonality nature of the agricultural sector. Valuation In valuing this stock, I will consider both relative valuation metrics and a net asset value/per share model. For the relative valuation metrics, the company’s trailing GAAP PE and PS ratios are 52.95 and 2.18 respectively, both of which are way above the sector medians of 21.51 and 1.31 respectively, implying that this stock is trading at a premium relative to its earnings and sales. To support the premium valuation assertion, let’s work out a net asset value/share model to assess the premium pricing. I believe this is a good model to value this company because CTVA operates in the agricultural industry, which is asset-intensive and therefore, using this model provides a clear picture of the company’s underlying assets. With total assets of $43.6 billion and total liabilities of $18.6 billion, CTVA has an NAV of $25 billion. Dividing this with the outstanding shares of 697 million (0.697 billion), the NAV/share is $35.86. Comparing this value with the stock price of $52.04 implies that the stock is trading at a 45.1% premium. With this premium pricing, I recommend patience for potential investors before investing here as we wait for the volatile financial performance to stabilize and the current headwinds (commodity prices and inflationary pressure) to subsidize. Conclusion In conclusion, CTVA is currently in a bearish trend with a very low CI, which means that the stock is susceptible to a more downside, especially given its premium pricing and volatile financial performance. The declining trading volume and diverging downward moving MACD confirm the bearish trajectory and the mounting selling pressure the stock is facing. For this reason, this stock is a hold until the price falls below its fair value and the bearish trend reverses, with the price moving above the MAs and the MACD crossing above the signal line.
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