DuPont Earnings Preview: Lower Corn Seeds Demand and Chemical Prices To Weigh On Earnings Growth

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DuPont (NYSE:DD) is set to announce its 2014 third quarter earnings on October 28. We expect the company to report a modest year-on-year growth in earnings per share on higher seed and chemical sales volume, mostly offset by lower pricing. While the third quarter is generally a weak one for DuPont’s agricultural products division due to seasonality in demand, we expect thinner margins this year due to lower demand for corn seeds. On the performance chemicals side, we expect lower refrigerant prices in the U.S. to weigh on the company’s third quarter results. During the earnings conference call, we will be looking for an update on the progress made by DuPont so far on the spin-off of its performance chemicals business.

DuPont generates annual sales revenue of around $36 billion 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. Its consolidated adjusted EBITDA margin stood at around 20% last year. We currently have a $72 price estimate for DuPont, which is around 5% above its current market price.

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Lower Corn Seeds Demand

According to our estimates, DuPont’s Agricultural Products division contributes the most, around 35%, to its total value. Last year, the division posted the highest revenue growth (13% y-o-y) within the company’s diversified portfolio on robust demand for its AQUAmax and AcreMax seed products, and Rynaxypyr insecticide. However, this year has not been as good for the division. During the first half, DuPont’s agricultural products sales revenue declined by 4% y-o-y due to lower corn seeds demand and early seasonal seed shipments made by the company during the fourth quarter of last year. Additionally, harsh weather conditions due to winter storms in North America also impacted its seed sales negatively during the first quarter. This had a significant impact on DuPont’s earnings growth because agricultural products contribute more than 40% to the company’s total consolidated sales revenue. [1]

Amid lower demand for corn seeds and herbicides, we expect DuPont’s agricultural products division to post a similar performance during the third quarter as well. Farmers have increasingly shifted away from corn this year due to better economies offered by the soybean crop under the current pricing and yield scenario. However, DuPont has not been able to tap the increase in soybean seeds demand to offset the decline in its corn seeds sales because its soybean line-up is undergoing a transition towards newer seed varieties. Since the company expects the demand for corn seeds to remain weak during the Latin America planting season as well, we expect its agricultural segment earnings to remain under pressure during the third quarter. [1]

Lower Refrigerant Prices

Apart from lower corn seeds and herbicide sales, DuPont’s second quarter earnings also came under pressure from lower chemical prices. According to our estimates, the Performance Chemicals division, which primarily deals in titanium dioxide (TiO2) and fluorochemicals, contributes around 15% to its total value. TiO2 is primarily used as a whitening pigment and is a key raw material of the paint manufacturing industry. On the other hand, fluorochemicals are widely used as refrigerants among other applications.

Last year, the performance chemicals division’s performance was severely impacted by lower TiO2 prices. However, this year weak refrigerant prices have been weighing on the company’s results. DuPont sells HCFC 22 and Isceon refrigerants, which have been under a significant pricing pressure recently due to oversupply in the U.S. market. During the second quarter, DuPont’s chemical prices declined by around 4% y-o-y, which led to a 6% decline in the segment’s adjusted operating income. We expect the trend to exhibit itself in the company’s third quarter results as well. [1]

In order to reduce the impact of cyclical volatility in chemical prices on its portfolio, DuPont decided to spin-off the performance chemicals division into a separate company in October last year. During the second quarter earnings call, the company officials announced that the spin-off process is on-track and is expected to complete by mid-next year.

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Notes:
  1. DuPont Reports Q2 Operating Earnings Per Share of $1.17, dupont.com [] [] []