DuPont (NYSE:DD) is set to announce its 2013 fourth quarter and full-year earnings on January 28. We expect the company to report full-year adjusted earnings per share (EPS) of $3.84, compared to $3.77 last year. According to our estimates, DuPont’s earnings growth would be primarily driven by higher agricultural sales, partially offset by thinner performance chemicals margins.
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 $64 price estimate for DuPont is almost in line with its current market price.
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Agricultural Products To Drive Growth
DuPont’s agricultural products division contributes almost one-third to its total value by our estimates. The division deals in the global seeds market, which is witnessing robust growth due to the growing 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. 
During the first three quarters of 2013, DuPont’s agricultural products division posted the highest revenue growth (~12% y-o-y) within its diversified portfolio on robust demand for its AQUAmax and AcreMax seed products, and Rynaxypyr insecticide.  We expect the company’s growing penetration in Brazil, Argentina and other Latin American agricultural markets to drive sales growth during the fourth quarter. Apart from this, early shipments in the North American seeds market and incremental sales from the recently acquired South African seed giant, Pannar, are also expected to boost DuPont’s agricultural products earnings during the quarter. (See: DuPont Plants The Seeds For Growth In Africa With Pannar Deal)
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 benefit from increased penetration of its Optimum Intrasect brand of corn seeds that include 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. However, currency headwinds from a stronger U.S. dollar will negatively impact sales growth. 
Thinner Chemical Margins To Offset Gains
DuPont has been hit by the weak realization of its performance chemicals division over the last few quarters. The division primarily deals in titanium dioxide (TiO2) and fluorochemicals, and makes up ~25% of DuPont’s total value by our estimates.
TiO2 is primarily used as a whitening pigment because of its brightness and a very high refractive index. It contributes ~50% to the division’s total sales revenue. 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.
However, demand for the pigment has been picking up recently, as indicated by the volume gains posted by DuPont over the past couple of quarters. This has also allowed the company to implement sequential price hikes on its TiO2 products globally in July and October this year. Despite this, operating margins of the performance chemicals division continue to remain under pressure due to lower selling prices and higher input costs. During the 2013 third quarter, the division’s operating income declined by ~40% y-o-y despite flat sales. We expect 2013 full-year adjusted EBITDA margins of DuPont’s performance chemicals division to decline by more than 600 basis points from 2012 levels. In order to reduce the impact of this cyclical volatility, which is inherent to the performance chemicals business, on its portfolio, DuPont decided to spin-off this division into a separate company in October 2013. (See: DuPont: The Year 2013 In Review)Notes:
- Adoption of Genetically Engineered Crops in the U.S., ers.usda.gov [↩]
- DuPont SEC Filings, sec.gov [↩]
- DuPont at Bank of America Merrill Lynch 2013 Global Agriculture Conference, dupont.com [↩]