There is reason to be bullish about Corteva, but CNBC’s Jim Cramer on Tuesday suggested that investors should wait for brighter days before investing in the agribusiness.
“I hope they will deliver a better-than-feared quarter when it reports on Thursday, but hope should never be part of the equation,” the “Mad Money” host said. “As much as I do like the company … the sector is having a very rough time.”
There’s a lot to like about Corteva, one of three companies that emerged from the recent DowDuPont breakup, Cramer argues. A pure play on agriculture, the entity is the second largest business in the industry formed through a tie-up of DuPont crop protection, DuPont Pioneer and Dow AgroSciences. The company makes genetically modified seeds — including corn, soybean, cotton and sunflower — intended to produce higher crop yields, he highlighted.
Corteva and Bayer, the largest player in the agribusiness arena, combined make up about 60% of U.S. seed sales, Cramer noted. Since its early-June spin-off, Corteva has climbed nearly 10%.
“This stock, Corteva, it reports again on Thursday morning and while there’s not a lot of enthusiasm about the quarter, management has been pretty bullish about the second half of the year,” Cramer said. “As Corteva prepared for its spin off, they told us the first half would be real ugly, but the second half would make up for that, and more so.”
However, there are some red flags on the field as the agriculture group has been hit by a number of curveballs this year. The ongoing trade war with China has been tough on American farmers and flooding across the Midwest this year has made it a challenge to produce crops.
Corteva expects full-year sales to be flat, following a rough first-quarter report, Cramer said. Facing pressure from tariffs and rough weather conditions, sales in North America tumbled 22%. Organic crop protection sales climbed 1% in the first three-month period of 2019 while organic seed sales depleted 10%, he added.
The company has cut $1.2 billion of costs and expects to cut $500 million over the next five years, which should lead to earnings growth. Still, the results won’t show up until 2020, a time frame that many analysts have mapped out, Cramer said.
The stock sells for 20-times next year’s earnings estimates, a number that is “pretty reasonable for a company that might be able to generate 16% long-term earnings growth,” the host said.
“Assuming they can meet those estimates, that’s not expensive, although it could be a lot cheaper,” he said. “So if you want to buy Corteva … I think you should wait. I’m betting you’ll get a better entry point than you’re getting” here.
WATCH: Cramer breaks down the state of the agriculture industry
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