After a disappointing 2015, DuPont (NYSE:DD) performed better in the first 9 months of 2016. Although competitive pressure continues to weigh on the business, DuPont managed to revive its growth in the third quarter of the year with higher volumes more than offsetting a decline in pricing. However, this revival could be temporary as some of Q4 business in agriculture segment was pulled forward into the third quarter. Additionally, the Dow-DuPont merger is under investigation from European Authorities, which casts doubt over whether the deal will go through. The crux is that while 2016 was better, the company is not out of the woods yet. Our price estimate of $62.50 for DuPont stands at a discount of about 15% to the market.
Pricing Pressure Kept Growth At Bay
Like its rivals, DuPont’s business has felt the impact of an industry-wide pricing decline resulting from intense competition and low raw material prices. The company’s revenue fell by 2% in 2014 and by nearly 11.5% in 2015. The first quarter of 2016 wasn’t much better, as sales and operating income fell by 6% and 5% respectively. However, there was some improvement as the year progressed. The decline in revenue was just 1% in Q2, and the third quarter saw nearly 1% growth. Net sales for the 9 months ended September 30, 2016 stood at $19.4 billion, about 2% less than the figure for the prior year. While volume sales were up by 1%, average prices fell nearly 1% and currency movement had a negative impact of another 2%. The situation is not as bad as it is for its rival Dow Chemical Company. However, to say that the company’s troubles are over would be premature.
- DuPont Earnings Preview: Meaningful Improvement In Growth Is Suspect
- Key Takeaways From DuPont’s Q3 Earnings
- 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?
Cost Reduction Plan Helped Profits
DuPont announced its cost savings and restructuring plan in December 2015, with the aim to reduce annual costs by $1 billion on a run rate basis by the end of 2016. To an extent, the plan seems to be working. Even though the revenues declined by 2% in the first 9 months of 2016, SG&A expenses fell more than 5% and R&D costs declined by almost 11%. DuPont has been making structural changes across multiple businesses and staff functions globally to operate more efficiently. This, along with the potential merger with Dow, can be viewed as factors that drove nearly 10% gain in DuPont’s stock price this year.
Dow-DuPont Merger Announced, Under Investigation By The EU
The biggest highlight of the year was the announcement of merger between industry giants DuPont and Dow Chemical Company, valuing the combined entity at about $130 billion. We believe the merger makes sense as it will allow the two companies to navigate recent challenges in the agricultural and chemical industries, and unlock shareholder value by eliminating redundant operations. The two companies have been facing pressure from activist investors because of stagnation resulting from the global slowdown, declining commodity prices, the strengthening dollar and bloated cost structures. The slowdown in the industry has prompted other players to pursue inorganic growth as well. The revenue growth of Monsanto and Syngenta has been flat for the past few years while over the last three years BASF’s (agriculture division only) revenue declined by about 3%. Monsanto had tried to acquire Syngenta in the past but withdrew later. At present, ChemChina is working on clearing hurdles which will allow it to acquire Syngenta and Bayer has announced its acquisition of largest agro-chemical player Monsanto for about $66 billion.
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