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Investment Overview for DuPont (NYSE:DD)
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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 15% in 2009 to 19.5% in 2011. We expect a continued increase in market share to roughly 21% 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 25% 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 16-17% 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 agriculture and nutrition business was 19.6% in 2011 and is expected to reach roughly 20% 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.
However, if margins show faster growth, reaching around 23% 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 future as well as a higher price premium on seeds.
On the other hand, a decline in margins to around 17% by the end of the Trefis forecast period would lead to a 10% downside in the Trefis price estimate.
Global TiO2 market share
DuPont's global TiO2 market share was around 20.4% in 2009. Market share increased in 2011 to around 21.3%, primarily driven by an increase in selling prices while volume increased only marginally. The growth in revenue, however, has been higher than the overall growth of the global specialty chemicals market. Going forward, we expect a slow but steady growth in market share for the division, which is estimated to reach close to 23.5% by the end of the Trefis forecast period.
If the market share shows exceptional growth, reaching above 30% by the end of the Trefis forecast period, there could be a 10% upside to the Trefis price estimate. Higher brand recognition of DuPont's high-performance materials, as well as additional capacity expansions are few factors that could lead to this upside.
However, if market share were to stay at close to 16% till the end of the Trefis forecast period, there could be a 10% downside to the Trefis price estimate.
Performance chemicals EBITDA margins
DuPont's Performance chemicals EBITDA margin (adjusted for pension and other items) stood at 25% in 2011. We expect margins to remain at around the same level over the course of our forecast period. Relative stability in margins is primarily attributable to increases in selling prices to offset raw material costs.
If margins exhibit faster than expected growth, and increase to around 28% 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 23% 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.
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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 & 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.
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We believe the performance and materials division and the agriculture and nutrition 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 growth of around $9 billion in 2011. 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 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
Significantly large market size for Performance and Safety Materials
The Performance and Safety Materials division falls under the global specialty chemicals market (excluding electronic materials). Due to the vast array of products and their applications, the market size (in real US dollar terms) for this industry was worth over $456 billion in 2011. Thus, despite the division's low market share value (around 4% in 2011), revenues are much higher due to the large market size.
Higher margins and market share for agriculture and nutrition
EBITDA margins for the agriculture and nutrition based products are expected to reach 18% by the end of our forecast period. Market share for the division has also been consistently and stood at about 10.2% in 2011. It is expected to reach around 11% 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, which contributes nearly 17% of total consolidated net sales for DuPont (FY 2010). Pioneer also continues to deliver innovative products to the seed market, such as the Optimum AcreMax 1. Increased consolidation in the seed industry is expected to increase gross margins as economies of scale are achieved.
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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 2008-09 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 & electronic chemicals and coatings due to the high level of industrial growth in these nations. Sales revenues of the Chinese specialty chemicals market are expected to contribute over 20% of the global specialty market sales in 2012. 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.
Price uncertainty in hydrocarbon-based raw materials
Many of DuPont's divisions rely on raw materials which are primarily hydrocarbon-based. This is especially applicable to the Performance and Safety materials division, which constitutes 49.7% of the Trefis price estimate. Examples of hydrocarbon-based feedstock includes benzene, polyethylene and butadiene. Hydrocarbon prices are highly volatile due to their dependence on various macroeconomic and political factors. Any spike in prices can put a downward pressure on DuPont's gross margins for some divisions.
Wide Spread use of solar energy
With the oil prices again sky rocketing in the first half of 2012, renewable energy is starting to come back into fashion. It is believed that the installation of photovoltaics will increase substantially in 2012 and will continue doing so for 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 it's income will grow by 30%. This will lead to increase in consumption of meat by 19% while consumption of crops will increase by 22%. This presents a huge opportunity for DuPont, that can leverage it's 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 2010.
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.
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