Note to Readers: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 2Q17 Earnings Update.
Previous Edition: Jul 25, 2017; Flash Update: 2Q17 Earnings Update.
Brokers’ Recommendations:Positive: 50.00% (5 firms); Neutral: 50.00% (5firms); Negative: 0.00% (0 firm); Prev: 5; 6; 0
Brokers’ Target Price: $88.63 (↑ $3.13 from the last edition; 8 firms) Brokers’ Avg. Expected Return:9.5%
Portfolio Manager Executive Summary
E.I. Du Pont de Nemours (DD) is a global science and technology-basedcompany, and a leading producer of polymers, automotive paints, agrochemicals, pharmaceuticals and specialty chemicals.
Out of the 10firms in the Digest Group covering the stock, fivefirms (50.00%) provided neutral ratings andfivefirms(50.00%)assigned positive ratingswhile none of thefirms rated the stock negative. Out of the 10firms,eight firms provided target prices.
The following is a summarized opinion of the diverse brokerage viewpoints:
Neutral or equivalent outlook (5/10 firms or 50.00%):The firms are hopeful about the company’s short-term actions including cost cutting and limit on capital expenditure as well as innovation. Moreover, these firms are encouragedbythe company’s historic merger announcement with Dow Chemical. Following the closure of the deal, the combined company (DowDuPont) aims to achieve $3 billion in cost savings in the first two years. Moreover,after a few months of the merger, DowDuPont intends to split into three separate companies with better focus, unique growth dynamics, capital requirements and business cycles.However, weak agrichemical demand and abundant inventories in North America remains as headwinds for the company. Additionally, insecticide inventories in Brazil continue to remain high.
Positive or equivalent outlook (5/10 firms or 50.00%): According to the bullish firms, DuPont is aligning its portfolio with improved focus on key growth areas, along with cost-saving strategies aimed at ensuring profitability amid a low growth environment, while curbing capital expenditures. Further, the company should benefit from its historic merger with Dow Chemical. Apart from cost savings, the firms think that having complementary businesses will help both companies to better leverage R&D activities and drive sales through improved cross-selling of products to existing customers worldwide. The merger with Dow should also improve earnings on the back of agriculture business. The bullish firms believe that agriculture will be a key driver of organic growth for the combined entity. Moreover, DuPont continues to expand in emerging markets. In addition, DuPont's broad range of products across industries such as agriculture, automotive and construction should provide long-term growth opportunities.
Additionally, DuPont's science-driven innovations contribute to its success as these help in differentiating its products, thereby providing the company with a competitive advantage over its peers. Further, a few firms believe that synergies from the merger and cost savings actions will drive growth for the company through 2018. Another bright spot is the electronic chemicals segment that will be one of the key growth drivers amid short-term headwinds.
Aug 11, 2017
Overview
The analysts identified the following factors for evaluating the investment merits of DuPont.
Key Positive Arguments / Key Negative Arguments- Proposed merger with Dow Chemicals.
- Strong focus on cost reduction and business restructuring
- Introduction of new products
- Robust pipeline of bio-based material products
- Strong global presence and diversified end-market exposure
- Lack of pricing power in commodity markets
- Low currency benefits from the strengthening U.S.dollar
- Sluggishglobal economic growth
- Heavy exposure to auto manufacturing and construction might be a significant drag on top-line growth
Based in Wilmington, DE, E.I. Du Pont de Nemours (DD) caters to the science and technology industries through a wide range of products, including high-performance materials, specialty chemicals, pharmaceuticals and biotechnology. The company operates globally through strategic business units that manufacture and sell a wide range of products to various markets, including transportation, textile, construction, automotive, agricultural and hybrid seeds, nutrition and health, pharmaceuticals, packaging and electronics.
DuPont produces polymers, fibers, paints, agrochemicals, pharmaceuticals and specialty chemicals. It currently has sixreporting segments. The Agriculture segment contains the Pioneer Hi-Bred International, Inc. (Pioneer) and DuPont Crop Protection businesses. Pioneer is a world leader in developing, producing and marketing corn hybrids 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.
The Electronics and Communication segment provides a wide range of advanced materials for the electronics industry, such as printed wiring board, flexible circuits, display materials and semiconductor manufacturing.
The Industrial Biosciences segment comprises 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 the other segment. From Jan 2016, the segment also includes the CleanTech business, which was earlier reported under the Safety & Protection segment.
The Nutrition & Health segment comprises 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.
The Performance Materials segment, which contains Performance Polymers and Packaging & Industrial Polymers, provides productive, higher performance polymers, elastomers, films, parts, and systems and solutions, which improve the uniqueness, functionality and profitability of its customer offerings.
TheProtection Solutions segment, previously Safety & Protection segment, which contains Protection Technologies, Sustainable Solutions and Building Innovations, caters to the growing global needs of businesses, governments and consumers for solutions that make life safer, healthier and more secure. The CleanTech and Consulting Solutions businesses are no longer reported under this segment, effective Jan 2016.
Further information on the company is available at
Note: DuPont’s fiscal year references coincide with the calendar year.
Aug 11, 2017
Long-Term Growth
Per the company, its long-term growth profile reflects the strength of its portfolio, innovations and ongoing benefits from disciplined productivity efforts.Global population growth and rising living standards in developing countries like China are fuelling global food demand. Meanwhile, lack of growth in available farmland requires increasing crop yield. DuPont is a leading crop seed company, which continues to build upon genetically modified seed technology. In addition, the acquisition of Danisco expanded the company's presence in the food and nutrition market. The firms believe that the company is wellpositioned to capitalize on agriculture and food growth opportunities.
Additionally, the company continues to expand in faster growing emerging markets. The firms expect DuPont to keep on expanding globally and penetrate into growing markets. These also believe that the company possesses the financial strength to execute its long-term growth strategy.
In Dec 2015, DuPont and Dow Chemical announced their merger of equals, which is expected to close on Aug 31, 2017. The combined market capitalization of the combined company will be $130 billion. In the long run, the combined company will be split into three individual, publicly traded companies as Agriculture Company, Material Science Company and Specialty Products Company. Each of these companies will be capable of allocating capital more effectively, innovating and increasing products and solutions for their global customer base. In the longer term, the three-way split is likely to provide shareholders as well as customers with greater value and opportunities to tap the global challenges in each of the segments.
One of DuPont's three strategic priorities in its plan to build a highergrowth, highervalue company is to extend its leadership in the science-driven segments of the agriculture-to-food value chains, and to leverage the linkages across these segments.
Over the next few years, about half of DuPont’s Agriculture segment’s growth is expected to occur outside of North America. The global seed pipeline released reinforces an integrated approach to product development and highlights agricultural solutions through differential breeding, plant protection traits, corn agronomic traits, soybean output traits and hybridization systems. These solutions build on the recent product success of Optimum AQUAmax corn hybrids and Optimum AcreMax corn products.
DuPont Crop Protection has a large number of novel insect, weed and disease control products in the pipeline to complement the success of Rynaxpyr products. In addition to Rynaxypyr, Cyazypyr and new fungicide products, the launch of new seed treatments under the Lumigen Seed Sense brand, is anticipated to contribute meaningfully to future growth.The company is also seeing favorable market response for its new Leptra corn hybrids in Brazil and its latest crop protection product, Zorvec fungicide. New offerings such as Zorvec and Vessarya fungicide are contributing to healthy crop protection sales and volume growth.
DuPont Nutrition & Health is using science to deliver customized nutrition solutions to improve health and protect food. With the increasing global population andtheir urbanizationas well asexpansion of the middle class, DuPont is committed to produce science-based solutions to improve the nutritional value of food while preventing food waste in the value chain.
DuPont is optimistic about achieving its long-term goals, given its portfolio strength, scientific capabilities, global reach, strong execution,prudent cost-saving measures and new product launches.
In Electronics, DuPont expects to benefit from higher adoption of the organic light-emitting diodes (“OLED”) technology for TVs and is well placed to capture incremental opportunities in consumer electronics and photovoltaic markets. For industrial bioscience, higher demand for enzymes in emerging geographies and increasing use of sustainable materials represent the driving factors.
For the Nutrition and Health unit, the rapidly growing specialty food ingredients market has been seen as an attractive opportunity. InPerformance Materials, healthy trends are being witnessed across packaging and light-weight automotives.Lastly, increased infrastructure investments and product innovation are among the key growth drivers for the Protection Solutions business.
Aug 11, 2017
Target Price/Valuation
Provided below is a summary of target price/valuation as compiled by Zacks Research Digest:
Rating DistributionPositive / 50.00%
Neutral / 50.00%
Negative / 0.00%
Avg. Target Price / $88.63↑
Digest High / $96.00
Digest Low / $78.00↑
Analysts with Target Price/Total No. / 8/10
Risks associated with the target price primarily include global macroeconomic uncertainty,particularly related to automotive and durable goods’ demand, a downtick in soft commodity prices and Agricultural technology,input cost headwinds, the lack of a payoff from the Danisco business and a gradual flattening of the titanium dioxide (TiO2) cost curve. Other risks include end-market demand, raw materials, pension expense, raw material price inflation, regulatory changes, lower seed pricing, weaker housing and TiO2 and broader economic recovery.
Recent Events
On Jul 25, 2017, DuPont reported2Q17 results.
DuPont recorded adjusted earnings of $1.38 per share in 2Q17, up 11% from $1.24 per share a year ago.
On a reported basis, DuPont posted earnings from continuing operations of $0.97 per share in 2Q17, a 16% decrease from $1.16 per share a year ago.
DuPont recorded net sales of $7,424 million in 2Q17, up roughly 5% y/y.
Revenue
DuPont recorded net sales of $7,424 million in 2Q17, up roughly 5% y/y.Volumes rose 6% in 2Q17, while local prices edged down 1%. The company saw higher volumes in all segments in the quarter. Revenues expanded in all but one reportable segment, Nutrition & Health, witnessing contractions.
Segment Revenue:
Agriculture
Revenues went up7% y/y to around $3,446million in 2Q17. Sales benefited from changes in timing of seed deliveries.
Electronics & Communication
Sales rose11% y/y to $546 million in 2Q17, aided by volume gains on higher demand in consumer electronics and semiconductor markets.
Industrial Biosciences
Sales increased11% y/yto $395 million in 2Q17 on higher volumes.
Nutrition & Health
Sales declined2% y/y to $818 million in 2Q17.
Performance Materials
Sales moved up 3% y/y to around $1,381million in 2Q17, aided by higher volumes and improved local prices.
Protection Solutions
Sales rose2% y/y to $801 million in 2Q17 on improved volumes.
Separation of Performance Chemicals
On Jul 1, 2015, DuPont announced that it has completed the earlier announced separation of its performance chemicals unit through the spin-off of The Chemours Company, a leading manufacturer of TiO2. Chemours – earlier part of DuPont – is now an independent, publicly traded corporation. The financial position and results of operations of the Performance Chemicals segment are classified as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented.
Chemours has started "regular-way" trading on Jul 1, under the ticker symbol “CC.” Mark Vergnano, who had been overseeing the performance chemicals unit since 2009, is the President and CEO of the new independent entity.
In connection with the spin-off, shareholders of DuPont received one share of Chemours on Jul 1 (the distribution date) for every five shares of DuPont they held on the record date of Jun 23, 2015. Moreover, DuPont shareholders will receive cash payments in lieu of fractional shares of Chemours.
Margins
Total segment operating earnings of $1,757 million increased 8.9% y/y in 2Q17 while operating margins increased about 80 basis points (bps). Operating margins expanded in all reportable segment mainly inElectronics & Communications, Industrial Biosciences and Agriculture.
Operating earnings by segment, according to the company, are as follows:
Agriculture
DuPont’s agriculture business’ operating earnings were $963 million in 2Q17, an 11% y/y improvement as the segment benefited from higher volumes that offset lower local pricing and increased product costs.Operating margins expanded by about 105 bps.
Electronics & Communication
Operating earnings for the segment jumped25% y/y to $116 million in 2Q17owing to volume gains on higher demand in consumer electronics and semiconductor markets as well as strong photovoltaic sales. Operating margins expanded by about 240 bps.
Industrial Biosciences
Earnings for this segment increased 23% to $76 million in 2Q17,owing to volume growth and better mix that more than offset higher costs.Operating margins expanded by 180 bps.
Nutrition & Health
Operating earnings increased4% to $135 million in 2Q17, on the back of volume gains. Operating margins expanded by 95 bps.
Performance Materials
Operating earnings rose 1% to $329 million in 2Q17, driven byhigher volumes and improved local prices. Operating margins dipped by about 50 bps.
Protection Solutions
Operating earnings improved 2% to $191 million in 2Q17 as higher volumes more than offset lower local price and increased costs. Operating margins fell by around 5 basis points.
Earnings per Share
DuPont recorded adjusted earnings of $1.38 per share in 2Q17, up 11% from $1.24 per share a year ago.
On a reported basis, DuPont posted earnings from continuing operations of $0.97 per share in 2Q17, a 16% decrease from $1.16 per share a year ago.
Capital Structure/Solvency/Cash Flow/Governance/Other
Capital Structure
DuPont ended 2Q17 with cash and cash equivalents of roughly $3,254million, down25% y/y.Total borrowings and capital lease obligations rose around 30% y/y to roughly $13.5 billion.
Dividend
On Jul 13, 2017, DuPont declared a 3Q17 common stock dividend of $0.38 per share payable on Sep 29, to shareholders of record as of Jul 31, 2017.
On Apr 27, 2017, DuPont declared a 2Q17 common stock dividend of $0.38 per share paid on Jun 14, to shareholders of record as of May 15, 2017.
On Jan 27, 2017, DuPont declared a 1Q17 common stock dividend of $0.38 per share paid on Mar 14, to shareholders of record as of Feb 15, 2017.
Acquisitions
On Dec 31, 2015, DuPont’s Industrial Biosciences business acquired all of the assets of the Industrial Technology business from Dyadic International, Inc. for $75 million in cash.
On Apr 22, 2015, DuPont declared that it has agreed to acquire Taxon Biosciences, Inc. – a leading microbiome discovery company. Financial terms of the deal were undisclosed.
This acquisition would enhance DuPont's in-house microbial platforms and build on its capabilities and market access in both seed and crop protection. This would help develop and market biological solutions for agriculture customers. The buyout would help DuPont in the development of new seed treatment, foliar and soil application products for important row crops, fruits and vegetables.
The takeover would boost DuPont's capabilities in biologicals, leveraging Taxon’s leading technology platform for the discovery of microbial-based products. Crop biologicals include microbes, plant extracts and other natural substances that are utilized to control pests and enhance plant health, quality and yield. Biologicals offer increased options and flexibility to farmers for controlling pests, and complement cutting-edge solutions for growers available from DuPont’s agricultural businesses.
Divestitures
On Mar 31, 2017, DuPont struck a deal to sell part of its Crop Protection business to chemical company, FMC Corp. DuPont has also agreed to buy all of FMC's Health & Nutrition business. DuPont will get $1.6 billion from the transaction, reflecting the difference in the value of the assets.
The divestment will satisfy DuPont's commitments to the European Commission in connection with the latter’s conditional regulatory approval of the proposed $130 billion mega-merger of DuPont and Dow Chemical.
Under the deal terms, FMC will buy DuPont's Cereal Broadleaf Herbicides and Chewing Insecticides portfolios along with the acquisition of Crop Protection research and development pipeline and organization. The said assets, generated revenues of around $1.4 billion last year.
As part of the deal, DuPont will purchase FMC's Health & Nutrition business that raked in more than $700 million in revenues in FY16. The acquisition, which is highly complementary to DuPont's Nutrition & Health business, will boost the company’s nutrition and health capabilities with expanded offerings and footprint.