DuPont’s Q3 Earnings Rise But Lower Corn Seed Sales And Chemical Prices To Weigh On Full-Year Growth

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DuPont’s (NYSE:DD) third quarter earnings rose higher on margin expansion in nutrition and health and safety and protection businesses, where the company achieved impressive productivity gains. However, lower agricultural sales volume and continuing pricing pressures in the performance chemicals segment continued to overshadow its consolidated performance. The company’s adjusted diluted earnings per share (EPS) of $0.54 for the quarter increased by around 20% y-o-y. Expecting continued earnings pressure in the agricultural products segment in the short term, DuPont is sticking to the full-year earnings guidance that it provided with the announcement of second quarter earnings. The company expects its 2014 full-year adjusted diluted EPS to fall in the range of $4 to $4.1. [1]

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. Based on the recent earnings announcement, we have revised our price estimate for DuPont to $70/share, which is 17.3x our 2014 full-year adjusted diluted EPS estimate of $4.04 for the company.

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Lower Corn Seed Sales

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 nine months, 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 35% to the company’s total consolidated sales revenue.

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. Furthermore, on the crop protection side, lower herbicide demand, primarily due to a wet spring this year, and de-stocking of inventories by its distributors also weighed on its operating results. Going forward, the company expects the demand for corn seeds to remain weak during the Latin America planting season as well, which is why it expects agricultural segment earnings to remain under pressure during the fourth quarter.

Lower Chemical Prices

Apart from lower corn seeds and herbicide sales, DuPont’s third 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 are 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 first nine months of this year, DuPont’s chemical prices declined by around 4% y-o-y, which led to almost 9% decline in the segment’s adjusted operating income.

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 third 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 3Q Operating Earnings Per Share of $0.54, Up 20 Percent from Last Year, dupont.com []