Despite wider-than-expected quarterly losses from Monsanto (NYSE: MON ) earlier this month, analysts' hopes from DuPont (NYSE: DD ) remain high as the company gets ready to report its third-quarter numbers next week.
Analysts expect DuPont to earn $0.41 per share on 5% higher revenue in the third quarter. That's a remarkable 28% improvement on the bottom line year over year. But with DuPont expecting large seasonal losses from its agriculture division, what is the Street betting on? More importantly, what are the critical things that investors should watch for in DuPont's upcoming earnings release that will help them assess where the company's headed to? Let's figure out.
DuPont needs to act fast
DuPont's third-quarter agricultural sales depend largely on the Latin American market as farmers prepare for the peak planting season. But there has been a marked shift in the farmers' preference of crops -- soybeans are rapidly edging corn out in the wake of high prices. According to industry forecasts, corn production in Brazil may drop 27% this year even as soybeans acreage hits a recordhigh. Monsanto confirmed this trend in its recently held earnings call.
This shift toward soybeans isn't as big a worry for Monsanto as it is for DuPont. Monsanto already dominates the Brazilian soybeans market with nearly 85% market share. Comparatively, DuPont has just about 10% of the market under its belt. Monsanto's recently launched next-generation Intacta RR2 PRO soybeans trait in Brazil could make DuPont's growth in the market even tougher.
In its upcoming earnings call, investors should thus pay close attention to how DuPont plans to tackle the situation, and whether it has any new soybeans products lined up for the Brazilian market. DuPont projects a "substantially larger seasonal loss" for its agriculture division in the third quarter on lower corn seed sales from Latin America. So if the company doesn't have any concrete plans for the market, investors may consider it a potential yellow flag.
Will DuPont follow Huntsman's footsteps?
Investors should also look for signs of a turnaround in DuPont's chemicals business in its upcoming earnings report. After a long lull period, the titanium dioxide, or TiO2 pigment, industry is finally picking up. DuPont had reported an 18% sequential increase and 12% improvement year over year in TiO2 volumes in the second quarter. If the upward trend persists in the third quarter, it will confirm the recovery of the TiO2 industry.
But what investors and analysts are really waiting for is an update on DuPont's plans for its TiO2 business. DuPont is considering options like a spin-off or sale of its TiO2 business in the wake of volatility and uncertainty, but nothing has been announced yet. The market has gotten even more excited after peer Huntsman (NYSE: HUN ) made a bold move last month by agreeing to acquire Rockwood Holdings' TiO2 business with the motive of spinning it off through a public issue in two years' time.
Though the deal will make Huntsman the second biggest TiO2 producer in the world after DuPont, several factors suggest that Huntsman may not have made the wisest move. It remains to be seen whether DuPont has a similar plan up its sleeves, or whether it chooses to entirely exit the TiO2 business. Since any form of portfolio reshuffling can have major implications on DuPont's future, investors must remain alert.
The much-awaited recovery
While its agriculture and chemicals businesses are more important, investors should also track the progress of DuPont's electronics and communications business. Like TiO2, the market for photovoltaic materials remained sluggish for several quarters. The division's numbers in DuPont's second quarter showed promise, so whether the industry is on its way to recovery will be clear from DuPont's third-quarter numbers.
The Foolish bottom line
After Monsanto's outlook of a 9% to 13% improvement in EPS for financial year 2014, DuPont investors will look forward to a bright guidance from their company. DuPont also needs to convince investors that it has its strategy in place to overcome challenges in key markets like Brazil; and that any decision regarding its TiO2 business will be in the best interest of its shareholders. Stay tuned as I take you through the key takeaways from DuPont's earnings report next week.
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