DuPont (NYSE:DD) is set to announce its second quarter earnings on July 23. We expect the company to report muted earnings growth from its agricultural products business that deals primarily in seeds and crop protection products due to bad weather conditions in North America and Europe. We also expect lower pricing due to continuing weakness in the TiO2 industry to negatively impact the company’s consolidated earnings for the quarter.
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According to our estimates, the agricultural products division contributes the most (~32%) to DuPont’s total value. It has been a significant growth driver for the company during the last few years. During the first quarter itself, agricultural revenues were up ~14% at $4.7 billion while consolidated revenues grew by just 2% to $10.5 billion. However, the division has been under pressure from bad weather in some of its key end markets during the second quarter and accelerated sales realized by the company during the first quarter. We therefore expect muted earnings growth from the division this quarter.
A majority of North America and Europe witnessed a cold spring season this year with showers that delayed planting, damaged already planted crops and also led farmers to abandon planting in some acreage. The abandonment of acreage due to wet and cold weather will mean lower sales for DuPont’s seeds and crop protection businesses. Some farmers in North America also turned in their corn and soybean seeds due to planting delays caused by cold weather. This is expected to result in higher supply chain costs as well as the cost of goods sold by the company impacting its earning growth from the division negatively. It should be noted that the company realized $0.02 operating income per share benefit during the first quarter due to the accelerated pace of seed deliveries, which is expected to be reversed during the second quarter as well. These factors drove DuPont to lower its earnings per share (EPS) guidance for the first half of the current year during the Deutsche Bank Global Industrials and Basic Materials Conference held on June 13. Previously the company guided for a 7-9% y-o-y decline in EPS, which it now expects to be ~10% below H1 2012 earnings.
According to our estimates, the performance chemicals division makes up more than 25% of DuPont’s total value. The company’s Titanium Dioxide (TiO2) business contributes almost 50% to the division’s revenues. TiO2 is a chemical used primarily as a whitening pigment because of its brightness and a very high refractive index. Slower-than-expected demand for the white pigment led to a huge inventory build-up at both the manufacturer as well as the customer level during 2011. This inventory build-up led to a sharp decline in the pigment’s prices during 2012, which weighed significantly on DuPont’s earnings through the first quarter this year. We expect lower TiO2 prices to negatively impact the company’s second quarter earnings as well.
However, the road ahead for DuPont’s TiO2 business is expected to be less painful. During the Deutsche Bank Global Industrials and Basic Materials Conference held recently, the company official suggested that inventory levels with customers have already normalized and producer level inventories will continue to normalize by the end of the second quarter. The normalization of inventory levels and rising demand from the U.S. housing industry allowed the company to implement a price hike on its TiO2 products this month.  This will boost DuPont’s earnings outlook for the second half of the year. The fact that DuPont’s TiO2 volumes were flat year-on-year during the first quarter, and even grew by almost 8% on a sequential basis from last quarter is further encouraging. This reflects a strong underlying demand for the pigment and also shows that lower price levels are are not sustainable in the long run. We therefore expect DuPont’s TiO2 business to bottom out by the end of this year.
We currently have $55 price estimate for DuPont, which will soon be updated based on the latest earnings announcement.Notes:
- DuPont and Tronox lead the third wave of TiO2 price increases in 2013, eshare.cnchemicals.com [↩]