DuPont (NYSE: DD) reported its Q3’16 earnings on October 25th. The company reported sales growth of 1% for the last quarter on year-over-year basis despite volume of growth of 3% on account of pricing pressure. In the fourth quarter, we expect sales to decrease at a low single-digit rate as Q4 business in agriculture segment was pulled forward into the third quarter. Also, due to changes in the sales channel in the Americas, another portion of Q4 segment sales was pushed out to the first quarter of 2017. Overall, we expect demand in the agriculture segment to face pressure due to macro factors. We expect performance materials segment to post growth on account of demand from automotive sector. DuPont reported operating EPS at $0.34 for Q3’16, a significant jump from $0.13 same period last year on account of cost-saving efforts. Further, on the merger with Dow Chemical, the timeline has been pushed to Q1’17.
Our price estimate for DuPont stands at $58 is under update
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Below are the key insights going forward:
- DuPont Earnings Preview: Meaningful Improvement In Growth Is Suspect
- DuPont: The Year 2016 In Review
- DuPont Q3 Earnings Preview: No Surprises Expected, Focus To Remain On Merger With Dow
- Dissecting Dow And DuPont Deal, Part 4: Concern Over Concentration
- Dissecting Dow And DuPont Deal, Part 3: Why Merge And Split?
- Dissecting Dow And DuPont Deal, Part 2: Are The Synergy Expectations Reasonable?
Growth In Agriculture Segment To Remain Depressed, Though Better Results Expected In Performance Materials
We forecast sales in agriculture segment to remain soft. The performacne of the company’s crop protection products has been constrained by high inventory levels, the increasing use of pest-resistant varieties of crops and low farm income. We also do not expect any significant increase in the demand for soybean products in the coming few quarters, on year-over-year basis. However, there can be an uptick in the demand of corn products from Latin America on account of the newly introduced variety of seed, Leptra. This will help DuPont gain share in the global corn market. Overall we expect flat to low single digit growth over the next fiscal year. It is worth noting that Ag segment contributes about 35% to DuPont’s value as per our estimates. The segment grew 2% in Q3’16 on a year-over-year basis.
According to our estimate performance material contributes about 25% to DuPont’s value. We expect the business to post growth because of demand from automotive sector, especially in China. Further, we also expect nutrition & health segment to grow at mid-single digit rate. The company has allocated $82 million in capex for the segment and has earmarked it as an important growth area.
Cost Savings Efforts Have Shown Result But Will Plateau Going Forward
Non-GAAP EPS improved to $0.34 in Q3’16 from $0.13 in same period last fiscal. The improvement was mainly on account of reduced SG&A expense across segments. DuPont had embarked on cost saving strategy last fiscal and plans to save $1 billion by year end. The company reported drop in SG&A and corporate expense by 15% and 25% respectively in Q3’16 on year-over-year basis. This has been the trend since Q4’15 when the company initiated the plans. Going forward we believe operating expense as percentage of sales will remain largely flat at the current level with slight seasonal variations.