Corteva

Corteva held investor presentations for Vylor, which is Corteva's seed business to be spun off in early October, and the remaining Corteva, which will become a crop protection pure-play following the divestiture.

Why it matters: The event featured pipeline outlooks for both businesses as well as capital allocation strategies. In our view, both companies have strong pipelines to develop new patented and differentiated products, which should support revenue growth and margin expansion. Separately, the attorneys general of 20 states, including California, as well as Washington, D.C., and several other cities and counties filed a motion to block Corteva's planned spinoff of Vylor due to concerns that Vylor will not have any liabilities related to PFAS chemicals. Corteva carries some PFAS liabilities from legacy DuPont in an agreement with DuPont, Qnity, and Chemours. Corteva has the smallest share of total liabilities. We think the separation is likely to move forward, but Vylor may have to agree to take some of Corteva's PFAS liabilities.

The bottom line: We raise our fair value estimate for wide-moat Corteva to $100 from $95. The increase reflects our improved outlook for the seeds business' royalty income, which will drive slightly higher revenue growth and greater margin expansion than our prior forecast. At current prices, we view Corteva shares as undervalued, with the stock trading nearly 20% below our updated fair value estimate and in 4-star territory. Investors who own shares of Corteva heading into the separation will end up with shares of both Corteva and Vylor. For Vylor, we see near-term profit growth driven by growing royalties as net seed royalties change from an expense to income, followed by long-term profits driven by new seed products. For Corteva, we see new crop protection products as the major profit driver.

We are raising our fair value estimate to $100 per share from $95 following the Corteva and Vylor investor presentations. The increase is due to our improved outlook for the seeds business' royalty income, which will drive slightly higher revenue growth and greater margin expansion versus our prior forecast. Our weighted average cost of capital is a little below 8%.

Corteva plans to spin off its seeds business in late 2026. The seed spinoff will be named Vylor and will be tax-free. Similar to how Corteva was spun off from DowDuPont, Corteva shareholders will receive shares in Vylor. We think the separation is likely to occur, but Vylor may have to agree to take some of Corteva's PFAS liabilities following the attorneys general of 20 states filing a motion to block the divestiture over concerns Vylor would be spunoff with no PFAS liabilities.

In 2026, we expect the seed and crop protection businesses will see mid-single-digit profit growth from a mix shift toward recently launched premium products, lower net royalty costs in seeds, and lower overhead costs. As Corteva sells a greater proportion of patented and differentiated crop protection products and seeds, we expect companywide EBITDA margin to expand from 22% in 2025 to 25% by 2030.

Our base case assumes that Corteva pays a total of $640 million in PFAS-related litigation and cleanup expenses. This assumes the maximum liability under the agreement with Qnity, Corteva, and Chemours. This includes the $1.185 billion settlement in the class-action lawsuit with multiple US water districts that cover the majority of the US population and the $875 million settlement payment to the state of New Jersey. The $1.15 billion estimate includes the $193 million Corteva paid for its share of the US public water systems class-action settlement in 2023 and its share of the New Jersey settlement in 2026, which will occur over a 25-year period. Due to the unknown timing of PFAS payments, we assume the remainder of our liability assumption is paid over the next 15 years, which is in line with the 20-year agreement.

Although we forecast PFAS cleanup and litigation to cost $40 billion industrywide, we assume historical DuPont (which includes today's DuPont, Qnity, Corteva, and Chemours) faces a total of $6.5 billion in PFAS-related costs, with most expenses coming from former historical DuPont chemical plants. We assume DuPont, Qnity, and Corteva pay a combined $2 billion over the next 20 years based on their agreement with Chemours. Based on the DuPont, Qnity, and Corteva liability-sharing agreement, DuPont and Qnity pay a combined 71% of all future PFAS costs, with DuPont taking 39% and Qnity taking 32%, and Corteva pays 29%. This results in around $640 million in total litigation for Corteva.

Given the range of outcomes for Corteva, we created a downside scenario, which produces a fair value estimate of $60. In this scenario, we assume Corteva's new products fail to gain traction, leading to little revenue growth and EBITDA profit margins a little over 20% throughout our five-year forecast, around 2024 levels. This scenario assumes Corteva's PFAS-related liabilities soar to $2.4 billion as Chemours is unable to pay the escalating liabilities and files for bankruptcy, resulting in 29% of liabilities being transferred to Corteva.

We also created an upside scenario, which produces a fair value estimate of $125. In this scenario, we assume Corteva's new products gain market share, leading to revenue growth above our base case. We also assume operating EBITDA margin expands to 29%, roughly 300 basis points above our base-case forecast.

We award Corteva a Wide Morningstar Economic Moat Rating based on the intangible asset moat source as a result of its portfolio of patented biotech seeds and crop chemicals. The company's patented products command pricing power as they protect farmer yields and reduce other expenses such as insecticides. Corteva's intangible assets stem from the research and development spending required for the continual development of proprietary seed and crop chemical formulations. As patents expire and crop pests such as weeds, insects, and fungi develop resistance to current products, seeds with new traits and new chemical formulations must be developed. As a result, moaty businesses in this space must continue to invest in R&D. Corteva invests roughly 8% of sales in new product development each year. This level of investment is in line with peers including Bayer (Monsanto historically averaged around 10%), Syngenta (historically averaged 9% when it was a public company), BASF (9% on agriculture), and FMC (7%), which gives us confidence that Corteva is investing enough to continue to develop new products.

Corteva is second in market share to no-moat Bayer in biotech seeds. We view Corteva and Bayer as the top two biotech seed companies, with Syngenta and BASF a distant three and four. Corteva's Enlist (soybean) and Qrome (corn) genetically modified platforms set the company up for long-term success as GMO seeds are adopted in emerging markets. Historically, Corteva has licensed seed technology from Bayer, but in recent years, the company has successfully transitioned its GMO portfolio toward its own proprietary technology. Corteva’s Enlist soybean seeds have grown to become the majority of the company’s soybean sales over the licensed Bayer’s Roundup Ready 2 seeds during the past three years amid several states banning or limiting the use of Bayer’s herbicide associated with its seed. Additionally, Corteva’s Qrome and Enlist seeds were the first GMO corn and soybean seeds approved for import into China. These wins demonstrate Corteva’s impressive standing as a premier GMO seed producer. As a result, Corteva should maintain its position as a clear number two and formidable competitor to Bayer.

Further, Corteva has begun to license its Enlist platform technology to other seed companies, which sets up the seeds business for a steady stream of profitable licensing royalties. Licensing contracts typically last at least a decade. In addition to the royalties, Corteva's licensing strategy will reduce competition. As potential competitors license Corteva's technology instead of developing their own, they are more likely to spend R&D on enhancing the base technology rather than invest in products that could usurp market share from Corteva's seeds.

In crop protection, Corteva has a formidable portfolio, generating EBITDA margins in the high teens to 20%, in line with patented moaty peers and above generic-focused competitors. The company sells some herbicides that complement its genetically modified seeds, but roughly 60% of sales come from patented and differentiated crop protection products, which command pricing power as farmers will pay up for the best products that fight difficult-to-kill weeds, insects, and fungi. Corteva is also the global leader in biologicals, a natural crop protection product. We expect this category of product will rapidly take market share over the next 10-20 years. While these products are more specialized based on region, biologicals are effective at preventing insects from damaging crops, with products also being developed to fight fungi and weeds. Additionally, increased environmental regulations that ban more crop chemicals from being sprayed in key markets such as Europe and Brazil will leave farmers increasingly turning to biologicals.

For Corteva’s seed and crop protection products, we view average commercial patent life as key to determining the moat duration. In seeds, the average patent life is 20 years. The first genetically modified seeds were planted in 1996, and the patents for these products expired in 2015, according to the American Seed Trade Association. Given our view that the commercial life of a seed’s patent protection spans well over a decade, Corteva’s seeds business earns a wide moat. While Corteva is a market leader in crop protection, we rate the business as having a narrow moat, as the average commercial patent life is 10 years in the crop protection industry. As patents expire, generic competitors often move in immediately, causing prices and profits to fall. Crop protection producers must continually commercialize their R&D pipelines just to maintain their competitive position.

Overall, we view a wide moat rating as appropriate for Corteva. Seeds generate the majority of profits, and we are confident this business will generate excess returns on invested capital for at least the next 20 years. While we have a narrow moat rating for crop protection, if this business struggled to replace patent expirations, we would not view it as value-destructive but rather value-neutral. If this occurred, it would be similar to Monsanto’s crop protection portfolio, when we awarded Monsanto a wide moat rating before being acquired by Bayer. All in all, we think Corteva is likely to outearn its cost of capital over at least the next 20 years.

Corteva's profits will see a boost as its net royalty expenses decline in the coming years from lower royalty payments and higher royalty income.

Corteva's genetically modified Enlist platform has had wins over Bayer in recent years in gaining approval for its GMO seeds to be imported into China, which should boost Enlist's market share.

Corteva's strong pipeline of patented crop protection chemicals will drive profits and margins higher as the company expands its proportion of sales from patented and differentiated crop protection products.

Management's plan to separate the seed and crop protection businesses will hurt shareholder value as it will create dissynergies from operating two publicly traded companies instead of one.

Corteva's new crop protection products will face increased competition from other premium producers, limiting the profit growth opportunity.

Corteva's genetically modified seeds will not see long-term success against competitors such as Bayer. As a result, Corteva will need to continue to license Bayer's seed technology for years, weighing on profits.