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Investment Overview for DuPont (NYSE:DD)
WHAT HAS CHANGED?
- Performance chemicals spin-off
DuPont recently spun off its Performance Chemicals division. The company first announced its decision to spin off the division in the second half of 2013. The decision was primarily driven by its objective to reduce the cyclical volatility, which is inherent to the performance chemicals business, in its broader portfolio. The Performance Chemicals division primarily deals in titanium dioxide (TiO2) and fluorochemicals, and had been under-performing the company’s overall portfolio for the last several quarters. This was primarily due to lower chemical prices, which weighed on its consolidated operating results.
According to our estimates, DuPont’s Performance Chemicals adjusted EBITDA margin has shrunk by more than 12 percentage points since 2011, and stood at just around 16.3% last year, well below the company-wide average of 20%. We believe the spinoff of TiO2 and other performance chemicals businesses will not only allow DuPont to focus more on science-based integration of its higher-margin Agricultural, Health and Nutrition, and Industrial Biosciences divisions, but will also reduce the level of operating risk associated with the company’s consolidated operations.
- Challenging agricultural products market conditions
The operating environment for Dupont’s agricultural products division is extremely challenging this year, because seed prices are expected to remain low – mostly because of a continued oversupply situation driven by yield improvements and favorable weather conditions in the U.S. In addition, farmers are expected to continue to move away from planting corn this year as well, because of better returns on other crops.
According to the latest World Agricultural Supply and Demand Estimates published by the United States Department of Agriculture (USDA), corn planted area in the U.S. is expected to decline from around 95.4 million acres last year to 90.6 million acres in 2015, while corn production is still expected to surpass last year’s record level due to a significant improvement in projected yield per harvested acre.
This essentially means lower demand for DuPont’s corn seeds, which account for approximately 50% of its agricultural products division’s total sales revenue. During the second quarter, the company’s sales and operating earnings from the division declined by around 11% and 7% y-o-y, respectively. Going forward, DuPont expects the division’s operating environment to remain challenged in the short term and has guided for a high-single-digit percentage decline in sales and a low-twenty percentage fall in operating earnings for the full year.
- Currency headwinds
DuPont has operations in more than 90 countries worldwide and about 60% of its consolidated net sales revenue comes from international markets. Since the company operates primarily in local currency in these markets, a strengthening U.S. Dollar negatively impacts its financial results. The U.S. Dollar has strengthened significantly against many international currencies, especially the emerging market currencies, since the second half of 2013, when the U.S. Federal Reserve started scaling back its bond-buying program.
According to historical currency charts provided by xe.com, the U.S. Dollar has strengthened by around 21%, 51%, and 66% over the last twelve months against the Euro (EUR), Brazilian Real (BRL), and the Russian Ruble (RUB), respectively. Based on the average basket of exchange rates for its business, DuPont currently expects the strengthening U.S. dollar to drag down its 2015 full-year earnings by $0.60 per share.
Below are the key drivers of DuPont's value that present opportunities for upside or downside:
Global corn, soybean, and other seeds market share
DuPont's global corn, soybean, and other seeds market share has risen steadily from around 14% in 2009 to 15.4% in 2013. We expect a continued increase in market share to roughly 16% by the end of the Trefis forecast period. The continued dominance of the Pioneer Hi-bred seed brand in the US corn and soybean seed market, as well as the increasing consolidation of the US seed industry, are key factors responsible for market share growth.
If market share increases to 20% by the end of the Trefis forecast period, there could be an upside of 10% to the Trefis price estimate. A higher-than-expected market share would depend on favorable conditions such as higher rates of consolidation in the industry as well as a higher sales expectation for the Pioneer seed brand.
In another scenario, if market share growth is slower than expected, reaching around 8-10% by the end of the Trefis forecast period, there could be a downside of 10% to the Trefis price estimate.
Agricultural science products EBITDA margins
EBITDA margins (adjusted for pension and other items) for the agricultural science products business was at 22.5% in 2013, and is expected to be relatively stable around that level by the end of the Trefis forecast period. Increased consolidation (acquisition of small/regional players by companies such as DuPont and Monsanto) in the seed industry is expected to generate economies of scale as fixed costs per unit are reduced. Although, consistent downward pressure on margins is expected to remain due to high research and development costs.
However, if margins show faster growth, reaching around 28% by the end of the Trefis forecast period, there would be an upside of 10% to the Trefis price estimate. Higher gross margins would depend on a high degree of economies of scale in the future, as well as a higher price premium on seeds.
On the other hand, a decline in margins to around 15% by the end of the Trefis forecast period would lead to a 10% downside in the Trefis price estimate.
Performance chemicals EBITDA margins
DuPont's Performance chemicals EBITDA margin (adjusted for pension and other items) stood at 17.4% in 2013. We expect margins to increase in the short to medium term and stabilize at around 21.6% by the end of our forecast period.
If margins exhibit faster than expected growth, and increase to around 30% by the end of the Trefis forecast period, there could be a 10% upside to the Trefis price estimate. This upside would depend on higher prices of high-performance materials, as well as higher-than-expected capacity utilization in the future.
On the other hand, if margins decline to around 15% by the end of the Trefis forecast period, there could be a 10% downside to the Trefis price estimate.
For additional details, select a driver above, or select a division from the interactive Trefis split for DuPont at the top of the page.
DuPont generates revenues by supplying high-performance materials and chemicals, electronic materials, high-performance coatings, and agricultural products to industries and consumers worldwide. The company relies on its technological expertise and research and development to deliver products catered to market needs. Most products manufactured by DuPont are used as raw materials in other industries, making it a predominantly B2B (business-to-business) based company (with the exception of agriculture and nutrition division which includes seeds and pesticides).
DuPont's products have a vast array of applications and are used by a wide range of industries which include farming (for agricultural products such as seeds and pesticides), construction, transportation, packaging, paper and pulp, and consumer electronics.
We believe the performance chemicals and materials division and the agriculture and nutrition division together make up the majority of DuPont's total value. The key factors responsible for this are:
Market size of Agricultural and Nutrition business
Agriculture was one of the top performing segments of the company delivering sales of over $11.7 billion in 2013. The company did well in both seed and crop protection businesses and looks poised to take advantage of the macro trend of increasing global food consumption. Over the next decade, approximately one billion people are expected to be added in the middle class, leading to growth in the area harvested by 11%, and global crop consumption by 22%. DuPont's product launches in this field (Drought optimum seeds, insect protection offering evolution) coupled with technology innovations (Advanced Supply Chain, Breeding and Pipeline) should help it capture a large share of this emerging market.
Higher margins and market share for agricultural science products
EBITDA margins for the agriculture and nutrition based products are expected to reach 23.5% by the end of our forecast period. Market share for the division has also been consistent and stood at about 15.4% in 2013. It is expected to reach around 16% by the end of our forecast period. Growth in both margins and market share is primarily attributable to the success of Pioneer - DuPont's flagship seed brand. Pioneer also continues to deliver innovative products to the seed market, such as the Optimum AcreMax 1 and AQUAMax. Increased consolidation in the seed industry is expected to increase gross margins as economies of scale are achieved.
Protracted global slowdown could stall DuPont's growth in the near term
The demand for chemicals and materials is strongly dependent on healthy macro-economic conditions such as GDP and industrial growth. The economic recession of 2008-2009 had significant adverse impacts on DuPont, leading to a decline in revenues of over 13%. While the global economy has recovered from its low point during the recession of 2008-2009, we expect modest revenue growth rates for most of DuPont's divisions in the near term.
Supply/demand shifting to emerging countries
Developing markets, especially China, present immense growth opportunities for specialty and electronic chemicals and coatings due to the high level of industrial growth in these nations. Additionally, multi-billion dollar stimulus packages introduced by the Chinese government for developing infrastructure, should boost specialty chemical demand for construction chemicals. With DuPont increasingly investing in R&D and customer support centers (such as the DuPont Automotive Center in Shanghai), we expect both demand and supply of DuPont key operating divisions to shift to emerging economies such as China, India, and Brazil.
Environmental regulations can restrict market share
In recent years, the global paints & coatings industry has seen increased monitoring from environmental agencies, primarily due to VOC (Volatile Organic Compounds) emissions which present a threat to the ozone layer.
Additional environmental concerns include PFOA (collectively, perfluorooctanoic acid and its salts, including the ammonium salt) which is a key processing agent in the performance and safety materials division. PFOA is believed to have adverse effects on human health, and while currently no regulations exist, any future restrictions over its usage have the potential to impact over $1 billion of DuPont's sales.
Wide Spread use of solar energy
When oil prices sustain higher levels, renewable energy starts to come back into fashion. It is believed that the installation of photovoltaics will increase substantially over this entire decade. This is good news for DuPont as it provides about 70% of the materials used in these panels.
Increasing global population and food demand
In the present decade, it is estimated that the global population will grow by 13% while its income will grow by 30%. This will lead to an increase in consumption of meat by 19%, while consumption of crops will increase by 22%. This presents a huge opportunity for DuPont, which can leverage its expertise in seeds, agriculture, and nutrition businesses to satisfy this demand.
Bio fuels emerging as an alternative to fossil fuels
Bio fuels is a large and addressable market which is being driven by energy independence, rural development, reduction of green house gases, and technology advancements. It is central to the efforts towards creating a green economy. It is expected that by 2020, this will be a global market of 45 billion gallons, up from 28 billion gallons in 2012.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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