DuPont Q3 Earnings Preview: No Surprises Expected, Focus To Remain On Merger With Dow

DuPont (NYSE: DD) will report its Q3’16 earnings on October 25th. The company had reported non-GAAP EPS of $1.24 for the second quarter, a jump of 14%  as compared to same quarter last year on account of reduced expenses. For the third quarter, we expect DuPont to report a continued decline in sales, largely because of depressed agri-commodities markets. We do not expect any significant improvement in operating margins as cost saving efforts would have been offset by new product launch costs. As a result we expect the company to post a drop in non-GAAP EPS as compared to Q2 of this fiscal. Having performed well in the first half of 2016 and relatively better expected performance in Q4’16, DuPont is likely maintain its non-GAAP EPS guidance of $3.15 to $3.20 for this fiscal year.

DuPont had reported a net sales of about $7 billion for Q2’16 a drop of about 1% on year-over-year basis. The decline was due to depressed prices and currency effects. However, the company has been trying to deliver value by better managing its operating and capital expenditure. This effort should help DuPont improve its free cash flow for the current fiscal year.

Our price estimate for DuPont stands at $58 is under update

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Expect Weaker Agriculture Business, Improvement In Performance Materials

Agriculture science division contributes about 35% to DuPont’s valuation according to our estimates. We expect weaker results for Q3 as compared to Q2 mainly on account of subdued demand for soybean and crop-protection products, as well as softness in prices. We also expect an increase in operating expense because of costs related to launch of new products. However, the company is likely to report better results for corn due to higher demand in the U.S. and Latin America. Its new product Leptra is likely to help it perform well in corn market.

For performance materials business, we expect DuPont to report higher sales driven by higher demand from automotive industry, especially from China. It is worth noting that performance materials contributes over 20% to DuPont’s value as per our estimates.

DuPont Dow Merger To Watch Out For

We expect the management to throw some light on where things stand on the announced merger with Dow Chemicals. The merger is under intense regulatory scrutiny globally and is facing opposition from farmers’ community (Read: Dissecting Dow-DuPont Deal: Concern Over Concentration). It was expected to be closed in H2’16. However, given the regulatory concern we expect the management to postpone the timeline of closure to H1’17.

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