DuPont Relies On Agriculture And Nutrition To Drive Growth

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DuPont (NYSE:DD) recently released its earnings for the second quarter of 2012. Although earnings fell short of expectations, numbers reported were 8% higher on a y-o-y basis, after accounting for extraordinary items. Similar to the previous quarter, earnings growth were primarily driven by robust growth in the Agriculture and Nutrition Based Products division. The company reaffirmed its full year earnings outlook of $4.20 – $4.40 per share, although it now expects the figure to be towards the lower end of this range.

Agriculture and Nutrition Based Products Division Drives Growth

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The Agriculture and Nutrition Based Products division continues to drive the revenue and earnings growth for the company. The division accounted for over 38% of the total revenues generated this quarter, compared to around 34% of revenues generated in Q2 2011. This gives an indication of the increasing importance of this division to the company’s operations. However, we also note that the growth is partly due to acquisition benefits and cost synergies derived from the Danisco specialty food ingredients business.

The Industrial Biosciences Division, although a small part of the total company value, grew at an outstanding rate of 144% (y-o-y). The Danisco enzyme business was acquired in mid 2011, and although a large part of the growth can be attributed to acquisition benefits, cost synergies resulting from the acquisition are finally being realized.

Several Divisions Face Volume Declines

The Performance and Safety Materials Division, which as per our estimates contributes to around 60% of the company value, has continued to suffer from volume declines. These volume declines were offset by price increases in the previous quarter, but that has not been the case this time round.

The Electronics & Communications Division has also faced similar declines in volume, mainly due to a sharp decline in demand for photovoltaic cells over the past couple of years. Another problem this division faces is the high volatility of metal prices, which have increased input costs dramatically. As a result, margins for this division have fallen substantially.

The question of whether or not the company can achieve its earnings target depends heavily on the performance of its Agriculture and Nutrition Based Products Division. Two major issues with this are that firstly, sales and profits from agriculture products usually thrive during the first two quarters of the year due to seasonal factors, and secondly, margins from agriculture depend heavily on input seed costs and currency movements, with over 50% of revenues from this division generated outside the US. Although the company hedges against currency and commodity price changes, the impact of volatile movements in these markets will no doubt affect profits.

Overall, considering the volume declines in most divisions, the current uncertainty in the global economy, and the reliance on a single division to drive growth, we are skeptical about the company’s full year guidance.

We currently have a Trefis price estimate of $57.14, which is about 20% above the market price. We are in the process of revising our forecast based on the earnings release, and will release an updated model soon.

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