DuPont Earnings: Earnings Beat, Strong Momentum Drive Stock Up

DuPont (NYSE:DD) recently reported its Q1 2017 earnings, and the stock went up slightly as a result of earnings beat. After a disappointing 2016 (except for the 4th quarter), it appears that DuPont has gained some growth momentum. The pricing pressure has eased off, and two of DuPont’s segments – Agriculture and Industrial Biosciences – actually saw an increase in average prices. On top of this, the Dow and DuPont merger has received EU regulatory approval. In an environment where price declines seem to be abating, a merger would imply even greater pricing power and could eventually result in meaningful synergies. Below we take a quick look at what we liked about DuPont’s first quarter results.

We are reviewing our price estimate of $62.50 for DuPont in light of the recent quarterly results, and expect to upgrade it considering the consistency in positive pricing trends and continued volume growth.

DuPont’s Biggest Business Is Showing Encouraging Pricing Trends

We estimate that DuPont’s agriculture segment accounts for nearly 35% of the company’s valuation. It has suffered from soft demand in recent quarters, and it would be premature to say that the challenges are over. However, the last few quarters have shown that DuPont is managing to grow both its volume and prices. The segment saw nearly 4% growth in Q1 2017, half of which can be attributed to price increases driven by gains in Brazil and the expansion of Pioneer brand seeds and Leptra crop protection products. The company launched Pioneer brand soybeans and also increased its sales of sunflower seeds, which has helped it offset decreased corn acreage. It must be noted that changes in the timing of seed deliveries benefited the first quarter’s agriculture volume growth.

So what happens next? We think that the acreage challenge is likely to continue. According to the U.S. Department of Agriculture, the cash receipts from crops may decline slightly or remain flat in 2017. This suggests that DuPont will continue to rely on Latin America and other international markets for its agriculture division’s growth. The company expects that its momentum in the first quarter will spill over to Q2.

Performance Materials, Second Biggest Segment, Is Showing Volume Surge

We estimate that DuPont’s performance materials segment accounts for nearly 25% of the company’s valuation. This segment saw growth of nearly 10%, second highest across all DuPont businesses, and almost all of it was driven by volume surge. This can be attributed to increased demand in the automotive market in Europe and China, as well as an increase in market share. In addition, DuPont benefited from increased demand in the semiconductor and aerospace markets. The company expects the growth rate to come down slightly in the second quarter. Nevertheless, the overall outlook looks reasonably good.

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