What Makes DuPont a Great Bet

DuPont (NYSE: DD  ) is gradually transitioning from a chemical major to an agriculture giant, as was evident from its first-quarter numbers. Good overall performance and a reaffirmation of its full-year guidance sum it up for the chemical giant.

But not everything was great about the quarter. Take a look.

The winner is agriculture
The quarter's highlight was undoubtedly DuPont's agriculture division's strong performance. Accounting for nearly 36% of total revenue, the division's sales climbed 16% from the year-ago quarter to $4.1 billion. Both price and volumes added 8% each to the rise.

Thanks to the unusually warm weather, North American farmers have taken to the fields early, pushing up seed and nutrient sales. The world's largest seed company Monsanto (NYSE: MON  ) had a great second quarter primarily because of this factor. Within the segment, DuPont's seed sales rose 20%, backed by corn. Monsanto's top-line growth was largely attributed to higher corn seed sales, too.

DuPont's seed business Pioneer Hi-Bred had released an amazing 154 new Pioneer hybrids and refuge products targeting North American growers in March. The timing was perfect, as the planting season was about to begin. These new launches were widely accepted, thus contributing to DuPont's net price gains.

Pains that persist
DuPont's electronics and communications division continues to be a drag. The effect of destocking by customers felt in the fourth quarter spilled over, resulting in a 17% fall in the division's sales. Peer Dow Chemical (NYSE: DOW  ) also suffered in its last quarter, and expects the softness to continue during its first quarter.

Continued growth in tablets and smartphones, however, is making up for some of the division's weakness, and DuPont expects volumes to pick up by the next quarter.

As for its performance chemicals and performance coatings divisions, although sales were up 6% each, it was entirely because of higher prices. Volumes continued their downward trend. But sequentially, there was slight improvement, and DuPont expects things to turn for the better in a quarter or two.

Heavy claims
Interestingly, one point that was hardly mentioned in the earnings call was charges incurred on account of claims pertaining to an herbicide case. After thousands of complaints of trees getting killed, DuPont suspended sales of herbicide Imprelis as directed by the Environmental Protection Agency last year. Several lawsuits followed, landing DuPont in a claim-paying run.

Including the $50 million accounted for in the first quarter, total charges have gone up to $225 million till March 31. But DuPont says they could shoot up to $575 million, and it may seek insurance recovery for costs above $100 million. Apart from weighing on margins, such issues also tend to be detrimental to a company's image.

The Foolish bottom line
The Danisco acquisition seems to have come at the perfect time. Post-acquisition, agriculture has emerged as one of the biggest revenue generators for the company, and there are no signs of the ag sector slowing down. With the U.S. Department of Agriculture predicting record corn plantations this year, DuPont looks set to make it big in the next quarter. Plus, a dip in natural gas prices (a key input for chemicals) should help lower costs.

The chemical giant has also kicked off a $400 million share buyback plan, which is music to investors' ears. Not to forget its handsome dividend yield of 3.1%.

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Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended creating a modified stock repair against synthetic long position in Monsanto. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2012, at 2:30 PM, funfundvierzig wrote:

    Neha Chamaria, a well articulated and informative review of DuPont's Q1 2012 results and outlook.

    One factor which may change Ms. Kullman's rosy outlook for full year 2012 earnings of $4.20 to $4.40 per share, minus "significant items," presumably the continuing high costs of handling Imprelis claims, is the disposal of DuPont car paints. Ms. Kullman has put her struggling DuPont Performance Coatings on the auction block May 7, 2012. Last year 2011, this unit brought in $4.3 billion in revenue, and PTOI of $268 million.

    ...funfun..

  • Report this Comment On April 24, 2012, at 2:56 PM, ajkmsteph wrote:

    what yopu fail to meantion is Dupont has failed to even copy Monsanto with its products. Its RoundUp ready corn and soy products are going no where. They licensed rootworm Bt etc from Dow while failing to win a single lawsuit with Monsanto - their final attempt /court case to get rights to roundUp ready from Monsanto starts this summer with a low chance of success (they lost the contract case) now they are trying to win on anti-trust - this from a compnay that never licenses anyone any of their technology. They used to be the market leader now they keep up by price cutting

  • Report this Comment On April 24, 2012, at 4:10 PM, funfundvierzig wrote:

    ajkmsteph,

    You make a very valid observation. Pioneer, once the largest, most innovative seed company on the globe lost that position to superior-performing Monsanto, subsequent to its acquisition and being subsumed into the DuPont chemical conglomerate bureaucracy over a decade ago.

    Tellingly, DuPont/Pioneer has and continues to pay Monsanto hundreds of $millions in fees to license Monsanto's superior traits to put into Pioneer's otherwise low-tech, conventional seeds. Pioneer for some time has coasted on price-discounting and inflated PR campaigns.

    ...funfun..

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