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Investment Overview for DuPont (NYSE:DD)
WHAT HAS CHANGED?
- Major restructurings and Dow-DuPont merger
Dow Chemical Company & DuPont announced a merger of equals in December 2015. The deal is structured as an all-stock transaction and the post-merger company will be called DowDuPont. Once the merger is completed, the combined company subsequently plans to split into three businesses, which would be focused on agriculture products, materials, and specialty products. The deal is yet to close.
The merger will be the second major restructuring for Dupont in recent times. The company spun off its Performance Chemicals division in 2015. This 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 dealt 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.
- Challenging agricultural products market conditions
The operating environment for Dupont’s agricultural products division will be 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. Lack of credit to farmers and higher seed and crop inventory would also hurt demand. Soybean is expected to be challenged on account of competition from local/regional players and reduced acreage under plantation. Corn is expected to perform relatively better on account on account of higher feed and residual demand. USDA August 2016 report projects higher corn plantation in Argentina, Mexico and India.
During the full year 2015, the company’s Agricultural Products sales dropped by 13% while operating earnings from the division declined by 30% year over year. Going forward, DuPont expects the division’s operating environment to remain challenged in the short term and has guided for a 10% decline in the division’s sales and a low-twenty percent drop in operating income for the first quarter of 2016.
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 stood at 14.4% in 2015. We expect the figure to increase to roughly 15.2% by the end of our forecast period. The continued dominance of the Pioneer Hi-bred seed brand in the U.S. corn and soybean seed market, as well as the increasing consolidation in the U.S. seed industry, are key factors responsible for market share growth.
However, if market share increases to 20% by the end of our forecast period, there could be an upside of 10% to our 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.
Agricultural science products EBITDA margins
EBITDA margin for the agricultural science products business was at 17.1% in 2015. 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. We expect the figure to improve in the near term on account of management's focus on cutting cost.
However, if margins show faster growth and reach around 28% by the end of our forecast period, there would be an upside of 10% to our price estimate for DuPont. 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% would imply 10% downside to our price estimate for DuPont.
DuPont generates revenues by supplying high-performance materials, 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.
Performance materials division and the agriculture & 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 is one of the top performing segments of DuPont. 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 to 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 such as drought optimum seeds and insect protection offering evolution, coupled with technology innovations should help it capture a large share of this emerging market.
Higher margins and market share for agricultural science products
We expect EBITDA margins for the agriculture and nutrition based products to be around 20.5% by the end of our forecast period. Market share for the division has been fairly consistent and stood at about 14.4% in 2014. Market share is expected to improve slightly going forward. Theg 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 performance materials is strongly dependent on healthy macro-economic conditions such as GDP and industrial growth. The economic recession of 2008-2009 had significant adverse impact on DuPont, leading to a 13% decline in revenues. Going forward we expect the segment to grow as global economic growth bounces back. The demand from automotive sector is expected to drive sales 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. However, the subdued oil prices may pose a challenge.
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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