DuPont Earnings Preview: Latin America Seeds To Drive Growth As TiO2 Business Shows Signs Of Turnaround

DuPont (NYSE:DD) is set to announce its third quarter earnings on October 22. The company is expected to report earnings growth from higher agricultural sales and improving titanium dioxide (TiO2) demand. We expect sales from the Agricultural Products division to be primarily driven by strong demand for corn, soybean and other seeds during the Southern Hemisphere planting season. On the other hand, improved demand, better pricing and normalized inventory levels for TiO2 will also help DuPont’s Performance Chemicals business.

DuPont generates revenues by supplying high-performance materials and chemicals, electronic materials, high-performance coatings and agricultural products to industries and consumers worldwide. Most products manufactured by DuPont are used as raw materials by other industries, making it a predominantly B2B (business-to-business) based company with the exception of the agriculture and nutrition divisions.

Our $58 price estimate for DuPont is almost in line with its current market price.

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Agricultural Products To Drive Growth

According to our estimates, DuPont’s agricultural products division contributes almost one-third to its total value. The division is riding on robust growth in the global seeds market with increasing adoption of genetically modified (GM) seeds. GM seeds provide farmers with higher yields, lower susceptibility to insects, increased tolerance to chemicals used for eliminating weeds (herbicides) and extreme climatic conditions such as drought. As a result, farmers in developed countries have largely adopted GM seeds. GM corn varieties make up ~90% of the total corn planted in the U.S. ^[1]

During the second quarter, the agricultural products division posted highest revenue growth within the company’s diversified portfolio on robust demand for GM seeds and crop protection products. We expect DuPont’s growing penetration in Brazil, Argentina and other Latin American agricultural markets to drive sales growth during the third quarter.

DuPont’s Latin American seeds business has more than doubled to $1 billion in net sales since 2008. The company has greatly improved its position in the key regional markets of Brazil, Mexico and Argentina. We expect DuPont’s seed sales during the quarter to grow primarily on increased penetration of its Optimum Intrasect brand of corn seeds that includes native traits to protect the crop from insects. Sales volume will also receive a boost from the company’s improved soybean seed capacity in Brazil. ^[2] However, currency headwinds from a stronger U.S. dollar will negatively impact sales growth.

Performance Chemicals To Show Improvement

DuPont’s overall performance has been hit by weak performance from its performance chemicals division over the last few quarters. The division primarily deals in TiO2 and fluorochemicals, and makes up more than 25% of DuPont’s total value by our estimates. The TiO2 business contributes almost 50% to the division’s revenues. TiO2 is a chemical used primarily as a whitening pigment because of its brightness and a very high refractive index. Slower-than-expected demand for the white pigment led to a huge inventory build-up at both the manufacturer as well as the customer level during 2011. This inventory build-up led to a sharp decline in the pigment’s prices during 2012 through the first half of this year, which weighed significantly on the company’s earnings. ^[3]

However, DuPont’s TiO2 sales volume grew strongly during the second quarter, both y-o-y and q-o-q, on improved demand across operating regions. The company officials also suggested during the second quarter earnings conference call that TiO2 inventory levels at both customer and producer levels have largely normalized. ^[4] This allowed the company to implement sequential price hikes on its TiO2 products globally in July and October this year. ^[5] We therefore expect DuPont’s performance chemicals business to post much better numbers during the third quarter.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Adoption of Genetically Engineered Crops in the U.S., ers.usda.gov [↩]
2. DuPont at Bank of America Merrill Lynch 2013 Global Agriculture Conference, dupont.com [↩]
3. DuPont SEC Filings, sec.gov [↩]
4. Q2 2013 DuPont Earnings Conference Call, dupont.com [↩]
5. DuPont Titanium Technologies Announces a Price Increase for Ti-Pure® Titanium Dioxide, dupont.com [↩]