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Morningstar | We Are Initiating Coverage on Corteva With a $41 Fair Value Estimate and Wide Moat Rating

On June 1, DowDuPont completed the Corteva spin-off, issuing one share of Corteva for every three shares owned of DowDuPont. We are initiating coverage on Corteva with a $41 per share fair value estimate. We assign a wide-moat rating to DuPont based on the intangible assets moat source from the firm's pricing power in its patented seeds and crop chemicals. We assign a high uncertainty rating to Corteva as the company faces factors outside its control, such as crop prices and farmer incomes, which affect farmer planting and purchasing decisions.

In seeds, which generated 56% of revenue in 2018, Corteva will continue to lag Bayer (Monsanto). However, we forecast the firm will be able to gain market share as DuPont's direct selling model combined with Dow's recent product wins against Bayer should entice farmers to switch seeds. Over the last couple of years, Corteva's Enlist corn and soybean seeds have won approval for import into China, while Bayer's have yet to do so.

Further, in 2023, the royalty agreement between Corteva (DuPont) and Bayer (Monsanto) for RoundupReady seed technology expires. The agreement, which was the settlement of a lawsuit between Monsanto and DuPont, requires Corteva to pay Bayer at least $1 billion per year in royalties. Between now and 2023, Corteva will produce a greater proportion of seeds using its proprietary Enlist genetically modified platform. Once the royalty agreement expires in 2023, we expect Corteva will reduce its reliance on the Bayer technology in relatively short order. This should boost EBITDA margins to the mid-20% range from roughly 19% we forecast in 2019.

Corteva has historically been one of the best crop chemicals producers in the world, which generated 44% of revenue in 2018, developing the crop chemicals equivalent of a blockbuster (annual sales greater than $1 billion). As pests are developing greater resistance to traditional crop chemicals such as glyphosate, farmers are increasingly demanding new crop chemicals products. With eight new crop chemicals products in the pipeline, we think Corteva is well positioned to continue the successful commercialization of new crop chemicals.

Finally, we assign a standard stewardship rating to Corteva. CEO Jim Collins has been with DuPont since 1984 holding various leadership positions prior to the merger with Dow in 2017. Since the merger, Collins has been the COO of the agriculture business, which is now Corteva. While management has been focused on reducing expenses to achieve cost savings synergy targets, we are in favor of the initial guidelines for investment in research and development at 10%-11%, which is above peers such as FMC and Syngenta (pre-ChemChina acquisition) and in line with Monsanto (pre-Bayer acquisition). We think the R&D investment will allow Corteva to gain market share from Bayer in seeds and continue to develop best-in-class crop chemicals, both of which will command pricing power due to their effectiveness.