What's the idea?
The global agricultural industry in 2024 has been characterized by both rising demand for commodities and significant challenges. Demand for grain, oilseeds, and meat has surged, contributing to rebuilding stocks-to-use ratios for corn and soybeans. However, the industry faces hurdles such as a 3% decrease in corn planted acreage in the US, severe flooding in Brazil's Rio Grande do Sul affecting soybean production, and the impact of corn stunt disease in Argentina, expected to reduce corn planting.
Corteva's financial performance has mirrored these industry challenges. In Q2 2024, the company reported operating earnings of $1.83 per share, exceeding analysts' expectations of $1.72 per share, but net sales of $6.11 billion were below analysts' projections of $6.16 billion.
In H1 2024, Corteva's net sales fell by 3% compared to H1 2023, primarily due to an 11% decline in the Crop Protection segment, which overshadowed a 2% growth in the Seed segment.
In response to these developments, Corteva has lowered its FY2024 guidance. The company now expects operating EPS to range between $2.60 and $2.80 per share (previous guidance was $2.70–$2.90) and revenue to fall within a range between $17.2 billion and $17.5 billion (prior forecast was $17.4 billion–$17.7 billion). The downgrade reflects heightened pricing pressures in the Crop Protection segment due to a competitive market and tighter farmer margins.
Additionally, Corteva's stock is trading at elevated multiples, including EV/Sales of 2.40x, EV/EBITDA of 11.88x, P/FFO of 17.73x, and P/E of 43.16x. Given the company's mixed performance and cautious outlook, these high valuations raise concerns that Corteva's shares may be overvalued.
We recommend buying PUT options on CTVA stock with a strike price of $55.00 and an expiration date of 17/01/2025. The option will cost about $2.70, while one contract will cost $270.0 since options are traded for 100 shares.
Clients who are more optimistic about the possible CTVA stock performance and would like to take a bullish position can purchase CALL options with a strike price of $55.00 and an expiration date of 17/01/2025. The option will cost about $1.80, while one contract will cost around $180.0.
About Company
Corteva Inc. (CTVA) engages in the provision of seed and crop protection solutions essential for the agriculture industry and food supply. It develops advanced germplasm and traits that produce yield for farms, and produces crop protection products for weeds, insects, other pests, and diseases protection. The company was formed in the result of the spin-off of DowDuPont in 2019, and is headquartered in Indianapolis, the US
Why do we like PUT OPTION CTVA.US @55?
Corteva Inc. (CTVA) is engaged in providing seed and crop protection solutions essential to agriculture and food production. It operates through the Seeds and Crop Protection segments:
The Seed segment involves developing commercial seed combining advanced germplasm and traits that produce optimum yield for farms. It supplies seeds mainly for corn, soybeans and sunflower markets. The segment contributed 55.0% to the company's revenue in 2023.
The Crop Protection segment includes production of products that protect against weeds, insects and other pests, and disease. It is a leader in global herbicides, insecticides, nitrogen stabilizers, pasture and range management herbicides and biologicals. The segment accounted for a 45.0% share in 2023 revenue.
Corteva's geographical footprint is predominantly centered in North America, which accounted for 49.9% of the company's revenue in 2023. Latin America follows with a 22.7% share, while the EMEA (Europe, Middle East, and Africa) region contributed 19.5% to the revenue. The Asia Pacific region, though smaller, represented 7.9% of Corteva's revenue for the year.
Corteva’s 2023 revenue breakdown by segment and product line
The global agricultural industry is usually impacted by many factors and 2024 is not an exception. On the one hand, the overall demand for agricultural commodities has been growing worldwide this year, driven by demand for grain, oilseeds, and meat during the 2023/24 period. Additionally, stocks-to-use ratios are rebuilding for corn and soybeans. On the other hand, several challenges have emerged, including decreasing corn planted acreage in the US, flooding in Brazil's Rio Grande do Sul affecting soybean crops, and the impact of corn stunt, which is expected to reduce corn planting in Argentina.
As a result, Corteva's financial results also turned out to be mixed, with some improvements in Q2 2024 but overall underperformance in H1 2024. In Q2 2024, the company reported operating earnings of $1.83 per share, an increase from $1.60 per share in the same quarter the previous year, surpassing analysts' expectations of $1.72 per share. Net sales for the quarter reached $6.11 billion, slightly up from $6.05 billion a year ago but falling short of analysts’ expectations of $6.16 billion.
In H1 2024, Corteva’s net sales in H1 2024 declined by 3% compared to the previous year, as declines in the Crop Protection segment more than offset gains in the Seed segment. Organic sales also decreased by 2% during this period.
The Seed segment saw net sales growth of 2% and a 4% increase in organic sales, with a 5% global price increase, particularly in North America, driven by the company’s price-for-value strategy. However, volume declines were primarily due to unfavorable weather and reduced planted areas in the EMEA region.
Conversely, the Crop Protection segment experienced an 11% decrease in both net and organic sales. Volume declines were influenced by adverse weather, destocking impacts in EMEA, and just-in-time purchasing behavior in North America. Additionally, prices declined by 4%, reflecting a broadly competitive pricing environment.
Corteva’s revenue in H1 2024
These developments have prompted Corteva’s management to lower FY2024 guidance:
- Operating EPS was lowered to a range of $2.60 to $2.80 per share, down from the previously anticipated range of $2.70 to $2.90 per share.
- Revenue guidance was revised to a range of $17.2 billion to $17.5 billion, compared to the prior forecast of $17.4 billion to $17.7 billion.
- Operating EBITDA was adjusted to a range of $3.4 billion to $3.6 billion, down from the previous range of $3.5 billion to $3.7 billion.
The downgrade in guidance is driven by several factors. On-farm demand for agricultural inputs remains steady, with farmers continuing to prioritize high-quality seed technology. This has allowed Corteva's Seed business to outperform the market, likely gaining market share and improving operational efficiency. However, despite signs of stabilization in global Crop Protection industry volumes, the segment is facing increased pricing pressures due to a highly competitive environment and tighter farmer margins. These challenges have led to a more cautious outlook for the remainder of the year.
At the same time, Corteva's management anticipates an improvement in EBITDA margins in H2 2024, driven by expected volume gains in both the Seed and Crop Protection segments, improvements in Seed net royalties, and cost benefits from productivity initiatives. With a current enterprise value of $40.28 billion and an expected FY2024 EBITDA of $3.6 billion at the high end, Corteva's forward EV/EBITDA ratio stands at 11.19x. This is higher than the 10.79x ratio anticipated by analysts, who expect the company to generate higher EBITDA. However, given the current market conditions, these optimistic expectations from analysts may be questionable.
Corteva’s operating EBITDA target for 2024
On top of that, Corteva’s current stock price seems overvalued relative to its historical average multiples: EV/Sales — 2.40x, EV/EBITDA — 11.88x, P/FFO — 17.73x. P/E — 43.16x. Therefore, as the company has not yet demonstrated outstanding growth rates and its projected targets do not justify such high multiples, we believe that Corteva's share price is overvalued.
Corteva historical multiples
How to use the idea
We recommend buying PUT options on CTVA stock with a strike price of $55.00 and an expiration date of 17/01/2025. The option will cost about $2.70, while buying one contract will cost $270.0, as options are traded for 100 shares.
The investor will profit if on the expiration day the price of the underlying asset is below the breakeven point of $52.30. The lower the CTVA stock price falls below this point, the greater the profit will be. We recommend closing the position when the option value reaches $5.50. In this case, the profit will be 103.8%.
If on the expiration day the price of the underlying asset is below $55.00 but above $52.30, the investor will receive a limited loss. If the price of the underlying asset is above $55.00, the investor will receive a maximum loss of $270.0.
The chart below shows the distribution of gains and losses from an option position depending on the CTVA stock price on the expiration date.
Bullish view on the stock and CALL options
It cannot be ruled out that some positive corporate developments could cause the stock to rise. If you are bullish on the company, you can buy CALL options with a strike price of $60.00 and an expiration date of 17/01/2025. The option will cost about $1.80, while buying one contract will cost $180.0.
If the price of the underlying asset is above the breakeven point of $58.45 on the day of expiration, the potential profit is unlimited.
If on the expiration day the underlying asset price is above $60.00 but below $61.80, the investor will receive a limited loss. If the price of the underlying asset is below $60.00, the investor will receive a maximum loss of $180.0.
Important note
Options must be purchased with a limit order. Buying an option contract with a market order can result in extremely unfavorable prices.
This is a speculative investment idea which carries increased risks. Investing in options can provide a 50%, 100%, 200%, and in some cases even higher returns, but also can lead to a complete loss of the amount invested! In cases where volatility is low, profit or loss can vary between 20% and 30%.
A prudent approach to implementing option ideas is to invest a small portion of the portfolio in many such cases. In this way, losses from unsuccessful ideas will be compensated by high returns on successful investments.
Key risks
There is a possibility that positive corporate events could cause CTVA stock price to rise. In this case, the PUT options would depreciate, but the CALL options would increase. The relatively low volatility of CTVA stock may cause the options to depreciate by the expiration date.