DuPont Q2 Preview: What We’re Watching

DuPont (NYSE:DD) is scheduled to announce its earnings for Q2 2012 on July 24. Earlier in the year, the company approved a 5% increase in dividends for the second quarter, taking dividends per share from $0.41 to $0.43. DuPont has a history of steady dividend increases. Also, the company has consistently generated profits over the past eight quarters while beating earnings estimates in the past four. A majority of its revenues and profits are derived from Performance and Safety Materials and Agricultural and Nutrition Based Products divisions.

We currently have a Trefis price estimate of $57.14, which is around 20% above the current market price.

Limited Growth for Performance/Safety Materials

We expect the Performance Materials division, which makes up around 60% of the stock price as per our estimate, to post lower growth figures as the global economic slowdown has decreased demand from buyers that constitute industries such as automotive, transportation and construction. Margins might witness a slight deterioration in the short term due to lower volumes.

One major issue facing the company is inflation in raw material and energy prices. This has led to a high rate of increase in cost of goods sold (COGS) over the past few years. DuPont has more than offset this increase through price and volume increases, but the global economic slowdown may make it difficult for the company to sustain volume growth. In addition, the pricing power has reduced substantially due to a number of price increases implemented. This is particularly acute in the case of its Titanium Oxide business.

Another issue DuPont faces over the medium term is high exposure to Europe. We expect revenues from its European operations will suffer because of the economic slowdown and general weakening of the Euro relative to the U.S. Dollar.

Agricultural/Nutritional Division to Lead Top Line Growth

DuPont’s agriculture division has thrived over the past few years due to volume and price increases globally as demand for agricultural products has grown globally. Although the division is susceptible to fluctuations in commodity prices and unanticipated weather changes, we expect it to continue generating strong revenues and drive future growth. The volume and price increases have also led to high operating margins for this division.

Overall, the projected earnings increase, which is relatively modest, mostly reflects the systematic factors such as economic deterioration in the Euro Zone, fluctuating raw material prices and currency rates, and slow growth in the U.S. The global economic slowdown has led to decreases in demand for many of its products, and revenues from foreign operations have further been reduced due to the weakening currencies relative to the U.S. Dollar.

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