DuPont (NYSE:DD) reported strong fourth quarter earnings on higher agricultural demand, which more than offset lower chemical prices. The company’s adjusted diluted earnings per share (EPS) of $3.88 for the full year grew by 3% y-o-y, beating our estimates by $0.04 per share. It also guided for the 2014 full-year adjusted diluted EPS to fall in the range of $4.20 to $4.45 on continued growth in agricultural products business and improving chemicals demand. DuPont also announced a $5 billion share buyback program, 40% of which would be executed this year itself. 
Based on the recent earnings release, we have updated our price estimate for DuPont to $78 a share, which is ~18x our 2014 adjusted EPS estimate of $4.40 for the company.
Robust Agricultural Demand Lifts Earnings
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DuPont’s agricultural products division continued its strong performance during the fourth quarter as well. The division led consolidated sales growth for the company amid higher demand for its seeds and crop protection products. At $1.8 billion, sales from the division grew 18% y-o-y on strong volume growth in both seed and insecticide sales. The recent acquisition of Pannar Seeds, Africa’s largest seed producing and marketing company also drove sales higher.  (See: DuPont Plants The Seeds For Growth In Africa With Pannar Deal)
Seed sales volume was primarily driven higher by earlier shipments for the Brazil Safrinha corn season, which is the second corn crop planted after early soybeans are harvested, as well as the North American planting season. This was primarily due to the company’s enhanced production and distribution capabilities in some of the key Latin American markets and the expansion of its successful “direct-to-farmer” distribution system in North America. However, it should be noted that this accelerated pace of seed deliveries during the fourth quarter would negatively impact DuPont’s next quarter agricultural earnings. The company estimates its Q1FY14 operating earnings from agricultural products to be impacted by $100 million, which is ~6.5% of what it achieved in Q1FY13. 
On the other hand, volume growth in the crop protection segment was primarily driven by increased demand for Rynaxypyr, which has been a hugely successful insecticide for DuPont. Higher demand for the product was driven by heavy insect pressure in Latin America and its unique mode of action that reduces the environmental impact while being extremely effective against a wide range of insects. The compound selectively activates ryanodine receptors in insects that causes them to stop feeding on leaves within minutes of ingestion. It also moves inside the leaf tissue where it is protected from being washed-off. This leads to more effective and longer lasting protection of crops from insects, resulting in higher yields for farmers.  Rynaxypyr contributed more than $1 billion to DuPont’s total sales revenue for the full year. 
Lower Chemical Prices Continue To Weigh
The performance chemicals division continued to drag down DuPont’s consolidated earnings during the fourth quarter as well. Although sales from the division increased marginally, operating earnings continued to remain under pressure due to lower chemical prices. The division primarily deals in titanium dioxide (TiO2) and fluorochemicals, and makes up ~20% 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. According to our estimates, lower TiO2 prices drove down its full-year adjusted EBITDA margins by more than 800 basis points y-o-y.
Although demand for the pigment has been improving recently, as suggested by the y-o-y volume gains posted by DuPont for four consecutive quarters now, its prices continue to remain weak. However, we expect performance chemicals margins to improve during the second half of this year on growing TiO2 demand, normalized inventory levels and easier y-o-y comparisons.
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. The company expects the transaction to be completed by mid-2015. Notes: