DuPont (NYSE:DD) is set to announce its 2014 first quarter earnings on April 17. We expect the company to primarily draw growth from its agricultural products business, which makes up more than 37% of its total value by our estimates. The first quarter of the year is generally a strong one for agricultural companies due to the onset of the planting season in North America. However, DuPont’s agricultural sales jumped disproportionately during the last quarter due to earlier seed shipments made by the company for the new planting season. This is expected to pull down its sales volume growth during the first quarter. Apart from this, we also expect lower chemical prices to continue to weigh on the company’s margins.
During the first quarter earnings call, we will be looking for an update on the progress made by the company so far on the spin-off of its performance chemicals business and the initial response to its recently launched Encirca whole-farm services.
We currently have a $75 price estimate for DuPont, which is more than 10% above its current market price.
Early Seed Shipments To Impact Volume Growth
DuPont’s agricultural products 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, the adoption of GM seeds has been growing rapidly in the developed world. GM corn varieties now make up ~90% of the total corn planted in the U.S. 
Last year, DuPont’s agricultural products division posted the highest revenue growth (13% y-o-y) within its diversified portfolio on robust demand for its AQUAmax and AcreMax seed products, and Rynaxypyr insecticide.  We expect the continuing strong demand for these products and incremental sales from the recently acquired South African seed giant, Pannar, to boost DuPont’s agricultural products earnings during the first quarter.
However, DuPont made some early seed shipments last quarter for the Brazil Safrinha corn season, which is the second corn crop planted after early soybeans are harvested, and the North American planting season. This is expected to weigh on its volume growth during the first quarter. The company was able to accelerate its seasonal seed sales due to the 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. Because of this, DuPont expects its first quarter operating income from agricultural products to be negatively impacted by ~$100 million, which is ~6.5% of what it achieved during the same period last year. 
During the first quarter earnings call, we will be looking for an update on the initial response to DuPont’s recently launched Encirca farm services. The company launched these services to tap the fast-growing precision farming market. It expects to generate more than $500 million in incremental annual revenues from these services in the long run, which is around 4% of its 2013 agricultural products sales revenue. (See: DuPont’s Encirca Farm Services To Bolster Agricultural Revenues)
Lower Chemical Prices To Weigh On Margins
DuPont’s performance chemicals division, which primarily deals in titanium dioxide (TiO2) and fluorochemicals, makes up ~19% of its total value by our estimates. The division weighed significantly on DuPont’s consolidated earnings growth last year. Although sales from the chemicals division declined by just around 7% y-o-y for the full year, operating income was down by more than 45% due to lower chemical prices. 
Slower-than-anticipated demand for the white pigment, TiO2, resulted in 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 and 2013, which weighed significantly on DuPont’s earnings growth. According to our estimates, lower TiO2 prices drove down the performance chemicals division’s 2013 full-year adjusted EBITDA margins by ~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 the past four consecutive quarters, its prices continue to remain weak. We therefore expect the company’s performance chemicals margins to continue to remain under pressure in the short to medium term.
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 the division into a separate company in October last year. During the first quarter earnings call, we will be looking for an update on the status of the spin-off transaction, which is expected to complete by next year, and an estimate of residual costs associated with it. Residual costs primarily include pension and post-retirement benefits costs associated with benefit plans retained by the company for previously divested businesses. DuPont incurred residual costs of around $200 million on the sale of its Performance Coatings business in 2012. Notes:
- Adoption of Genetically Engineered Crops in the U.S., ers.usda.gov [↩]
- DuPont SEC Filings, sec.gov [↩] [↩]
- Q4 2013 Segment Slides with Commentary, dupont.com [↩]
- DuPont Conference Call on Performance Chemicals Segment Spin-Off, dupont.com [↩]