EI DuPont de Nemours & Company
/ (DD-NYSE)We are upgrading our recommendation on DuPont to Neutralfollowing its better-than-expected fourth quarter results. Both revenues and adjusted earnings beat the Zacks Consensus Estimates.However, profit tumbled year over year due tohigher costs and lower demand across titanium dioxide and photovoltaic markets.DuPontcontinues to witness weakness across a number of end markets.The company is exposed to raw material cost inflationand currency headwinds and is seeing a decline in sales volumes across many segments. Nevertheless, the company is witnessing strength in its agriculture and food businesses and should continue to benefit from the synergies of Danisco acquisition. Moreover, DuPont has a healthy balance sheet and remains committed to boost shareholder returns.
/ Equity Research / DD | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 01/24/2013
Current Price (01/23/13) / $47.50
Target Price / $50.00
SUMMARY
/ Equity Research / DD | Page 1SUMMARY DATA
52-Week High / $53.8052-Week Low / $41.95
One-Year Return (%) / -0.24
Beta / 1.46
Average Daily Volume (sh) / 5,329,986
Shares Outstanding (mil) / 941
Market Capitalization ($mil) / $44,698
Short Interest Ratio (days) / 4.09
Institutional Ownership (%) / 64
Insider Ownership (%) / 0
Annual Cash Dividend / $1.72
Dividend Yield (%) / 3.60
5-Yr. Historical Growth Rates
Sales (%) / 6.7
Earnings Per Share (%) / 9.8
Dividend (%) / 0.7
P/E using TTM EPS / 14.3
P/E using 2013 Estimate / 12.1
P/E using 2014 Estimate / 11.3
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Low,
Type of Stock / Large-Growth
Industry / Chem-Diversifd
Zacks Industry Rank * / 107 out of 267
OVERVIEW
DuPont is a global chemical and life sciences company, employing about 70,000 people worldwide with a diverse array of product offerings. With around 19,000 patents and 18,000 patent applications worldwide, DuPont sells its products in diverse markets such as transportation, construction, apparel, agriculture, nutrition and health, packaging and electronics markets.
In 2011, DuPont acquired Danisco A/S (Danisco), a global enzyme and specialty food ingredients company. This acquisition was valued at $6.4 billion, plus net debt assumed of $0.6 billion.
DuPont’s business is segregated into the following major heads: Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials and Safety & Protection. The company includes certain embryonic businesses not included in the reportable segments, such as pre-commercial programs, and nonaligned businesses in “Other”.
Agriculture: Agriculture businesses, Pioneer Hi-Bred International, Inc. (Pioneer) and DuPont Crop Protection, leverage the company's technology, customer relationships and industry knowledge to improve the quantity, quality and safety of the global food supply and the global production agriculture industry. Pioneer is a world leader in developing, producing and marketing corn hybrid and soybean varieties which improve the productivity and profitability of its customers. Additionally, Pioneer sells canola, sunflower, sorghum, inoculants, wheat and rice.
DuPont Crop Protection serves the global production agriculture industry with crop protection products for field crops such as wheat, corn, soybean and rice; specialty crops such as fruit, nut, vine and vegetables; and non-crop segments, including forestry and land management.
Electronics & Communications: This is a leading supplier of differentiated materials and systems for photovoltaics, consumer electronics, displays and advanced printing that enable superior performance and lower total cost of ownership for customers.
Industrial Biosciences: This segment is comprised of Danisco's enzyme business acquired in 2011, as well as the DuPont Sorona renewably sourced polymer and BioPDO 1,3 propanediol businesses, previously reported in Other.
Nutrition & Health: This segment comprises of Danisco's world leading specialty food ingredients business and Solae, a majority-owned venture with Bunge Limited, which is a world leader in developing soy based technologies. The segment is the premier provider of innovative solutions for specialty food ingredients, health and safety.
Performance Chemicals: Performance Chemicals businesses, DuPont Titanium Technologies and DuPont Chemicals and Fluoroproducts, deliver customized solutions with a wide range of industrial and specialty chemical products for markets including plastics and coatings, textiles, mining, pulp and paper, water treatment and healthcare.
Performance Materials: Performance Materials businesses, Performance Polymers and Packaging & Industrial Polymers, provide productive, higher performance polymers, elastomers, films, parts, and systems and solutions which improve the uniqueness, functionality and profitability of its customers' offerings.
Safety & Protection: Safety & Protection businesses, Protection Technologies, Sustainable Solutions and Building Innovations, satisfy the growing global needs of businesses, governments and consumers for solutions that make life safer, healthier and more secure.
In 2012, Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials and Safety & Protection divisions accounted for 30%, 8%, 3%, 10%, 20%, 18% and 11% of the company’s total sales.
REASONS TO BUY
DuPont is witnessing significant momentum in its agriculture business, boosted by higher volume and market share gains in seed genetics and crop protection. It expects continued strong growth in crop protection in 2013 driven by new products. The company's long-term plan includes compound annual growth targets of 7% for sales and 12% for earnings per share. Sales in developing markets, which include China, India, and the countries located in Latin America, Eastern and Central Europe, Middle East, Africa, and Southeast Asia, are targeted to make up 40% of the company's sales by 2015.
DuPont is focused on an aggressive cost-cutting strategy by reducing fixed costs, retrenching employees, restructuring work schedules and improving working capital productivity. The company exceeded its 2012 goals for fixed cost and working capital productivity. DuPont surpassed its three-year (2010-2012) target of $1 billion fixed cost productivity and actually delivered more than $1.2 billion in cost productivity. Moreover, it delivered working capital productivity of $1.6 billion over the three-year period, thereby exceeding its $1 billion target. The company expects cost productivity of at least $300 million in 2013 in addition to the targeted $300 million savings from restructuring actions.
DuPont is committed to maintain a strong balance sheet and to return excess cash to shareholders. It paid $1.6 billion in dividends in 2012. Moreover, the company, in late 2012, announced a $1 billion share repurchase program. The new buyback program will be backed by the proceeds from the divestiture of the performance coating business and will complete this year.
DuPont continues to execute strategies for further development and growth of new products, particularly for agriculture, photovoltaics, other alternative energy and materials and to address global megatrend needs for increased food supply, reduced environmental footprint and security. The company, in 2012, launched a record number of new products including 154 new corn hybrid and 33 new soybean varieties in North America and a next-generation phytase enzyme.
The acquisition of Danisco has strengthened the company’s presence in the food ingredient and enzyme markets, while expanding its presence in industrial biotechnology and biofuels. This will boost the company’s move toward developing biotech-based approaches to address global challenges in food production and reduced fossil fuel consumption. The acquisition is in line with DuPont’s strategy to expand beyond its chemical and manufacturing focus into the “megatrend” sectors of agribusiness and alternative energy. Both the industries are expected to grow rapidly in the coming years as food demand and prices increase and as clean energy policies gain more ground.
REASONS TO SELL
DuPont witnessed weakness across a number of businesses in the most recent quarter. Lower demand for photovoltaic materials led to a decline in sales in its Electronics & Communications unit. Moreover, the demand of titanium dioxide, which is used to give paint and other coatings a white hue, remained weak, partlydue to the challenging economic conditions in Europe.The company expects a decline in titanium dioxide prices to be a major headwind in 2013 and impact its earnings in the first two quarters. Softness across the industrial and electronic sectors is also affecting the results of the Performance Materials segment.
The company has a significant number of international transactions involving exchange of foreign currency. It is thus exposed to fluctuations in currency exchange rates, interest rates and commodity prices. Negative currency impact weighed on the performance of a number of segments in the most recent quarter and hurt the company’s earnings in 2012.
DuPont is also exposed to higher energy and raw material costs, which if not offset fully by the increase in prices, may have a significant impact its results.The company expects a 5% hike in raw material, energy and transportation costs in 2013, partly due to higher seed input costs. Moreover, DuPont has been focused on several R&D projects. Failure to capture the value of these R&D projects would reduce its earnings growth potential.
The company plans to grow earnings by focusing on developing markets and solutions to meet increasing demand for food productivity, decrease dependency on fossil fuels and protect people, assets and the environment. Failure to develop and market new products and manage product life cycles could impact the company's competitive position and have an adverse effect on the company's financial results.
DuPont competes with major global companies that have strong intellectual property estates supporting the use of biotechnology to enhance products, particularly in the agricultural products and production markets. Failure to predict and respond effectively to the competition could cause the company's existing or upcoming products to become less competitive, adversely affecting sales.
RECENT NEWS
DuPont Beats, Charges Crimp Net - January 22, 2013
DuPont beat expectations in the fourth quarter of 2012 but higher costs and weakness across titanium dioxide and photovoltaic markets contributed to a sharp fall in its profit.
The company posted adjusted earnings from continuing operations (excluding the divestiture of performance coatings business) of $0.11 per share for the fourth quarter, down from the year-ago earnings of $0.26. That, however, beat the Zacks Consensus Estimate of $0.09.
The adjusted earnings exclude one-time items including charges of $66 million associated with the company’s restructuring measures and $168 million associated with asset impairment and legal claims by customers related to the use of an herbicide.
Including one-time items, the company recorded earnings from continuing operation of $0.02 per share in the quarter, a sharp decline of roughly 94% from $0.31 registered in the prior-year quarter. Consolidated net income, as reported, tumbled 70% year over year to $111 million or $0.12 a share. Weak results from the company’s performance chemicals business contributed to the decline.
Net sales for the quarter were essentially flat year over year at $7,325 million as negative currency impact and reduction from portfolio changes neutralized higher sales volumes. Sales beat the Zacks Consensus Estimate of $7,253 million. Including other income, total revenues were $7,572 million. Volume rose 3% driven by gains across Asia Pacific and Latin America.
Despite currency headwinds, DuPont’s Agriculture segment delivered healthy sales in the quarter. Moreover, the Danisco acquisition contributed to the growth across the company’s Industrial Biosciences and Nutrition & Health divisions.
For full-year 2012, adjusted earnings from continuing operation was $3.33 per share compared with $3.55 recorded a year ago, missing the Zacks Consensus Estimate by a nickel. Reported earnings per share from continuing operation fell to $2.61 per share from $3.30 a year ago.
Net sales, for the year, rose roughly 3% year over year to $34,812 million, but fell behind the Zacks Consensus Estimate of $35,852 million. Total revenues (including other income) came in at $35,310 million.
Segment Analysis
Agriculture: Sales climbed 18% year over year to $1.5 billion in the fourth quarter. An 11% growth in volumes coupled with a 7% rise in pricing more than offset the unfavorable currency exchange impact.
Electronics & Communications: Sales edged down 1% to $622 million as a 2% gain in volume was offset by a 3% fall in pricing. Sales were affected by weak demand for photovoltaic materials, partly masked by higher demand for materials used in smartphones and tablets.
Industrial Biosciences: Sales rose 4% to $300 million on the back of higher volumes and pricing. Strong sales of Sorona polymer and gains in food enzymes in Europe led to higher volume.
Nutrition & Health: Sales rose 6% to $853 million on higher volumes and better local pricing across the board. Healthy demand for probiotics, cultures and enablers led to higher sales volumes.
Performance Chemicals: Sales slipped 15% to $1.6 billion on account of an 8% decline in volumes and 7% lower selling prices. Lower fluoropolymers demand across the U.S. and Europe contributed to the decline in volumes while a weak titanium dioxide market hurt pricing.
Performance Materials: Sales went down 5% to $1.5 billion as a 3% gain in volumes was more than offset by a 5% decline in selling prices and a 3% reduction from a portfolio change. Industrial and electronics markets continued to show weakness, offsetting strong demand in the North American automotive market.
Safety & Protection: Sales crept up 2% to $964 million. Increased demand for sustainable solutions offerings and U.S. residential and commercial construction products led to a 3% increase in volume. This was, in part, offset by a 1% decline in pricing due to unfavorable currency.
Divestiture
DuPont, in August 2012, struck a deal with private equity firm Carlyle Group to divest its performance coatings business for $4.9 billion in cash. The transaction is expected close in the first quarter of 2013, subject to necessary approvals. The move is intended to better focus on accretive businesses like agriculture and nutrition, bio-based industrials, and advanced materials.
Beginning with third-quarter 2012 results, the Performance Coatings segment has been classified as discontinued operations and is excluded from the company's continuing operations results, on a retroactive basis.
Financial Health and Shareholder Returns
DuPont exited 2012 with cash and cash equivalents of $4.3 billion, up 19% year over year. Long-term borrowings and capital lease obligations was $10.5 billion as at the end of the year, an 11% year over year decline.
Outlook
For 2013, the company expects adjusted earnings to rise 2%-7% year over year to a band of $3.85 to $4.05 per share. Revenues for the full year are expected to be roughly $36 billion.
DuPont Profit Skids, Slashing Jobs- October 23, 2012
DuPont reported consolidated adjusted earnings of $0.44 per share in the third quarter of 2012, a roughly 36% decline from the year ago earnings of $0.69. Including one-time items, earnings came in at a penny per share, a sharp drop of roughly 98% from $0.48 registered in the prior year quarter. Lower demand across titanium dioxide and photovoltaic markets led to the decline in profit.
Adjusted earnings from continuing operations (excluding the divestiture of Performance Coatings business) were $0.32 per share. The results missed the Zacks Consensus Estimate of $0.46. Including one-time items, the company posted losses from continuing operations of $0.05 per share compared with earnings of $0.39 in the prior year quarter.
Net sales from continuing operations declined 9% year over year to $7.4 billion, due to lower sales volumes, negative currency impact and reduction from portfolio changes, partly offset by higher local prices. Sales missed the Zacks Consensus Estimate of $8.08 billion. The company witnessed lower sales volumes from the Electronics & Communications and Performance Chemicals businesses, especially in Asia Pacific.
Separately, DuPont announced a restructuring plan including an elimination of 1,500 jobs. The company also cut its earnings outlook for the full year.
Segment Details
Agriculture: Sales in the quarter rose 4% year over year to $1.4 billion, benefiting from a 7% growth in volumes partly offset by 3% lower prices. Unfavorable currency, higher input costs and higher investments in commercial and R&D activities to support growth led to a pre tax operating income (PTOI) seasonal loss of $85 million compared with a loss of $69 million in the year ago quarter.
Electronics & Communications: Sales plunged 28% to $607 million due to a 20% decrease in sales volumes and an 8% decline in selling prices. Sales were affected by weak demand for photovoltaic materials though it was partly offset by increased demand for smartphones and tablets. PTOI decreased 59.6% to $40 million due to lower volumes.
Industrial Biosciences: Sales were almost flat versus the year ago quarter at $292 million as higher volumes were offset by lower prices due to unfavorable currency. PTOI increased 23.5% to $42 million owing to higher volumes and realization of cost synergies related to the integration of the Danisco enzyme business.
Nutrition & Health: Sales jumped 4% to $876 million, mainly due to higher volumes and higher local prices. Increased demand for specialty food ingredients and Solae specialty soy products led to increased sales volumes. PTOI shot up 58.2% to $87 million, reflecting the positive impact from the Danisco acquisition, higher local selling prices and higher volumes.
Performance Chemicals: Sales declined 19% to $1.7 billion, with a decline of 18% in volumes and 1% lower selling prices. Volumes declined, particularly in Asia-Pacific and Europe, due to weak demand for titanium dioxide and fluoropolymers. PTOI decreased 37.3% to $372 million due to lower volumes.
Performance Materials: Sales went down 8% to $1.6 billion, with a 7% decrease in selling prices and a 3% reduction from a portfolio change, partly offset by 2% higher selling volumes. Industrial and electronics markets continued to experience weak demand, offsetting the strong demand in the automotive markets. PTOI increased 32.5% to $306 million due to lower feedstock costs and higher volume, partly offset by unfavorable currency.