DuPont’s Earnings Decline On Lower Corn-Seed Sales, Stronger U.S. Dollar

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DuPont (NYSE:DD) announced its 2015 first quarter results this Tuesday. The company’s GAAP net income per share declined 27% year-on-year to $1.13, while its earnings per share (EPS) adjusted for the impact of non-operating, non-recurring items fell by 15% y-o-y to $1.34. As expected, most of the decline in the company’s adjusted EPS came from lower agricultural products sales volume and the negative currency translation effect induced by the appreciation of the U.S. Dollar against most international currencies. In the agricultural products segment, DuPont’s first quarter sales volume declined primarily because of lower corn-seed sales as farmers increasingly shifted away from planting corn this year due to the oversupply situation, which has been weighing on corn prices in the commodity markets over the past few quarters. In addition to lower corn-seed sales, the company’s profits also declined because of the sluggish demand for its performance chemicals products, especially titanium dioxide (TiO2). On the other hand, a stronger U.S. Dollar stripped off $0.25 per share from its first quarter adjusted EPS. In view of continued headwinds from a projected decline in corn-planted area in the U.S. and the strengthening U.S. Dollar, DuPont now expects to be on the lower end of its full-year operating earnings per share guidance 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 19.7% last year. Based on the first quarter earnings announcement, we have revised our price estimate for DuPont to $64 per share, which values it at 16x times our 2015 full-year adjusted diluted EPS estimate of $4.00 for the company.

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Lower Corn-Seed Sales

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, the division’s growth prospects have been significantly challenged since last year’s decline in seed prices and a shift away from corn planting. In 2014, DuPont’s agricultural products sales revenue declined by 3.7% and margins shrunk by almost 50 basis points y-o-y, by our estimates. This had a significant impact on the company’s overall earnings growth during the period because agricultural products contribute almost 33% to the company’s total consolidated sales revenue. The operating environment for Dupont’s agricultural products division continues to remain challenged this year as well, because seed prices are expected to remain low – mostly because of a continued oversupply situation driven by yield improvements and favorable weather conditions in the U.S. In addition, farmers are expected to continue to move away from planting corn this year as well, because of better returns on other crops.

According to the latest World Agricultural Supply and Demand Estimates published by the United States Department of Agriculture (USDA), corn planted area in the U.S. is expected to decline from around 95.4 million acres last year to 90.6 million acres in 2015, while corn production is still expected to surpass last year’s record level due to a significant improvement in projected yield per harvested acre. [2] This essentially means lower demand for DuPont’s corn seeds, which account for approximately 50% of its agricultural products division’s total sales revenue. During the first quarter, the company’s sales and operating earnings from the division declined by around 10% and 21% y-o-y, respectively. Going forward, DuPont expects the division’s operating environment to remain challenged in the short term and has guided for a mid-single-digit percentage decline in sales and a low-to-mid-single digit percentage fall in operating earnings during the second quarter. [3]

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 28%, 36%, and 44% over the last twelve months 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 $0.80 per share, $0.20 per share higher than its earlier estimate. 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. [1]

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Notes:
  1. DuPont Reports 1Q Operating EPS of $1.34, dupont.com [] []
  2. World Agricultural Supply and Demand Estimates, usda.gov []
  3. DuPont First Quarter 2015 Earnings Call Presentation, dupont.com []