DuPont (NYSE:DD) will report its Q4 2016 earnings on January 24th. We don’t expect a substantial change in the growth compared to what we saw in Q3. While the company’s Performance Materials segment likely benefited from healthy demand in the automotive sector, a couple of accounting considerations may well have weighed on the results. A portion of agricultural business from Q4 got pulled forward into the third quarter, and changes in the sales channel in the Americas likely pushed a small chunk of Q4 segment sales into the first quarter of 2017. Having said that, the fundamentals behind DuPont business hold more importance from investor perspective. The biggest problem that DuPont and other key players in the chemicals industry are facing is subdued pricing. That’s not going to go away anytime soon and the proposed merger between DuPont and Dow Chemical Company is primarily aimed at revitalizing the bottomline amid this pricing pressure. Therefore, we think that any update on EU review of this proposed deal holds a significant importance. Other companies are evaluating similar strategy. 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.
Our price estimate of $62.50 for DuPont stands at a discount of about 15% to the market.
How DuPont’s Biggest Business, Agricultural Science Products, May Perform
- DuPont: The Year 2016 In Review
- 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?
Accounting considerations aside, we think that DuPont’s agriculture segment’s growth will remain subdued. The inventory level of its crop protection products remains high, indicating softness in the demand. Additionally, the increasing use of pest-resistant varieties of crops, coupled with stagnation an decline in farm income, will continue to impact DuPont’s sales. According to United States Department of Agriculture, net farm income is expected to decline by nearly 17% in 2016. This can be attributed to stagnation in crop related farm cash receipts and a decline in animal related cash receipts. However, there can be an uptick in the demand of corn products from Latin America, driven by the newly launched seed variety, Leptra.
We estimate the agricultural science products division constitutes nearly 35% of DuPont’s value.
The Story So Far Hasn’t Been Pretty For DuPont, But Still Better Than Dow’s
Like its rivals, DuPont’s business has felt the impact of 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 nine months ended September 30th 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 movements had a negative impact of another 2%. The situation is not as bad as it is for its rival Dow Chemical Company. The net income has improved more, partially due to cost reduction plan that DuPont has been implementing. Even though the revenues declined by 2% in the first nine months of 2016, SG&A expenses fell more than 5% and R&D costs declined by almost 11%. The aim is to reduce annual costs by $1 billion on run rate basis.
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