DuPont: Soft Agricultural Products Market and Currency Headwinds To Weigh On 2Q Earnings

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DuPont (NYSE:DD) is scheduled to announce its 2015 second quarter earnings on July 28. [1] We expect the impact of lower seed prices, a reduction in corn planted area in the U.S. and Brazil, and currency headwinds due to a stronger U.S. Dollar, partly offset by productivity improvements, to weigh on the company’s earnings growth. The prices of corn and soybean seeds, which make up a large chunk (approximately 70%) of DuPont’s agricultural products sales, have plummeted over the past few months due to a record harvest in the U.S., primarily led by favorable weather conditions and yield improvements. In addition, farmers have increasingly shifted away from planting corn since last year for better margins on soybeans and other crops. These trends are expected to weigh significantly on DuPont’s second-quarter financial results.

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 20% last year. We currently have a $55/share price estimate for DuPont, which is around 5% below its current market price.

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Lower Corn Seeds Sales

According to our estimates, DuPont’s Agricultural Products division contributes the most, more than 38%, 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. [2]

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. [3] 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. 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 for the second quarter. [4]

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 21%, 51%, and 66% 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. 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. [5]

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