Lower Seed Prices, Currency Headwinds, Weigh On DuPont’s Earnings Growth And Outlook

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DuPont’s (NYSE:DD) fourth quarter earnings rose  on better margins in Agricultural Products and the Performance Materials divisions. Margin expansion was primarily driven by productivity measures and gains on asset sales.  However, lower seed prices and currency headwinds weighed on the company’s earnings growth. DuPont’s 2014 full-year adjusted diluted earnings per share (EPS) came out at $4.01, 3.4% higher compared to the previous year, but fell short of our estimates by around $0.03. The company guided for relatively flat net revenue this year, primarily on account of the offsetting impact of the strengthening U.S. dollar, while EPS adjusted for non-recurring, non-operating items is expected to fall in the range of $4.00 to $4.20. [1]

DuPont generates annual sales revenue of around $35 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 21% last year. Based on the recent earnings announcement, we have revised our price estimate for DuPont to $70/share, which is 17.2x our 2015 full-year adjusted diluted EPS estimate of $4.06 for the company.

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Lower Seed Prices

According to our estimates, DuPont’s Agricultural Products division contributes the most, around one-third, to its total value.  In 2013, 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, 2014 was not a great year for the division. During the year, DuPont’s agricultural products sales revenue declined by 4% y-o-y due to lower corn and soybean seed prices and market share loss in the Americas. The prices of corn and soybean seeds, which make up a large chunk of DuPont’s agricultural products sales, plummeted last year due to record harvest projections in the U.S., primarily led by favorable weather conditions and yield improvements. This had a significant impact on DuPont’s earnings growth during the period because agricultural products contribute almost 33% to the company’s total consolidated sales revenue. [2]

In addition to lower seed prices, DuPont’s Agricultural Products division was also negatively impacted by lower demand for corn seeds.  Farmers increasingly shifted away from planting corn last year due to better economies offered by the soybean crop under the prevailing pricing and yield scenario. However, DuPont was not 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. With little or no improvement expected in seed prices in the short to medium term due to growing distributor inventories, we see the demand for corn seeds to remain weak in 2015 as well, which is why we expect DuPont’s agricultural segment to post lower revenues and thinner margins this year.

Currency Headwinds

DuPont has operations in more than 90 countries worldwide and about 60% of its consolidated net sales revenue comes from international markets. Since the company operates primarily in local currency in these markets, a strengthening U.S. Dollar negatively impacts its financial results. The U.S. Dollar has strengthened significantly against many international currencies, especially the emerging market currencies, since the second half of 2013 when the U.S. Federal Reserve started scaling back its bond-buying program. According to historical currency charts provided by xe.com, the U.S. Dollar has strengthened by around 20%, 9%, and 105% since the beginning of 2014 against the Euro (EUR)Brazilian Real (BRL), and the Russian Ruble (RUB), respectively. Based on the average basket of exchange rates for its business, DuPont currently expects the strengthening U.S. dollar to drag down its 2015 full-year earnings by $0.60 per share. Although, we believe that the actual impact on earnings could be higher since the depreciation of a local currency against the U.S. dollar might lead to higher relative prices of DuPont’s products in the local market, thereby weakening its competitive positioning as well. [2]

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Notes:
  1. DuPont Reports 4Q and Full-Year 2014 Operating EPS of $0.71 and $4.01, dupont.com []
  2. DuPont Q4 2014 Earnings Conference Call Presentation, dupont.com [] []