After trading flattish so far this year, shares of chemical giant DuPont (NYSE: DD ) could be headed for a big move next week as the company reports its fourth-quarter and full-year numbers Tuesday morning. With rival Monsanto (NYSE: MON ) delivering a good set of numbers earlier this month, expectations from DuPont are running high. Meanwhile, the consensus view about the chemical industry has also improved -- analysts estimate Dow Chemical's (NYSE: DOW ) and Huntsman Chemical's (NYSE: HUN ) fourth-quarter EPS to climb 30% and 58%, respectively.
But with competition intensifying, DuPont investors must carefully asses the company's growth strategies in its upcoming earnings call. More importantly, check for the real growth in DuPont's bottom line because what the company reports may not give you a complete picture.
Think beyond analyst estimates
During the company's last earnings release, DuPont CEO Ellen Kullman projected a substantial jump in operating earnings for the fourth quarter. That may explain why the Street expects DuPont's Q4 EPS to jump fivefold. But remember, DuPont doesn't provide guidance for net profit. Instead, it uses a non-GAAP metric -- operating earnings per share -- to assess performance and provide an outlook.
While operating earnings may be a meaningful measure of a company's operational performance, one-time charges, such as those related to customer claims, litigations, and restructuring, have generally been substantial in DuPont's case. As a result, higher operating earnings (which excludes those unusual expense items), do not necessarily translate into greater net income. For example, DuPont reported an operating EPS of $0.45 during its third quarter, but net earnings were only $0.30 per share.
Since DuPont is still paying out for claims against the discontinued Imprelis herbicide, has several litigations pending, and has been restructuring operations aggressively in recent months, investors can expect to see another big gap between its operating EPS and net EPS next week. Of course, the operating EPS will make it to the headlines, while the real net earnings will be lost in the jumble of numbers. If I were you, I'd assess the company based on the latter.
Investors shouldn't expect much from DuPont's top line either: The Street projects its fourth-quarter revenue to grow just about 6% year over year. So a major part of the company's profits should be a result of cost-cutting instead of higher sales.
DuPont's agriculture business should once again lead the scoreboard, especially with Monsanto reporting 7% year-over-year increase in its total revenue for the fourth quarter. The good news is that DuPont finally expects to earn a "small fourth-quarter profit" from its agriculture business on lower costs. The bad news is that Monsanto's seed and genomics sales slipped 5% in its last quarter, so it remains to be seen whether DuPont will be able to turn this segment around.
That said, agriculture business is seasonal, so investors shouldn't read much into one weak quarter. Instead, they should focus on the ongoing trends in DuPont's other key businesses since the upcoming earnings call could hold valuable insight.
Two things to watch for
DuPont's electronics and communications business may finally be turning around after a soft year. Both DuPont and Dow Chemical reported positive growth in sales volumes for electronic materials in their respective third quarters. If the trend continues into the fourth quarter, it could confirm a recovery.
But DuPont may not be as big a beneficiary as Dow Chemical, since the latter dominates the lucrative smartphone and tablet material market. DuPont's sales, on the other hand, depend on photovoltaic and solar materials, demand for which slowed down significantly last year. Watch out for two things in DuPont's upcoming earnings call -- whether it intends to diversify and what are its plans for China where photovoltaic power installations are expected to pick up this year.
Recovery in sight?
Likewise, DuPont's performance chemicals business, which sells titanium dioxide pigment, is also showing signs of recovery. DuPont reported higher TiO2 volumes in each of the past three consecutive quarters. A repeat in the fourth quarter should confirm an improvement in industry fundamentals. That's essential, at least until the company spins off the TiO2 business, which is still more than a year away. Among updates on the spin-off, DuPont has already appointed a CEO for the new performance chemicals company, and investors should expect more details in the upcoming call.
But the segment will likely underperform in the fourth quarter since input costs are still high. Investors should not miss DuPont's stand on TiO2 price hikes, especially since Huntsman Chemical plans to "aggressively" increase prices this year. That should help the companies boost revenue.
With Monsanto projecting at least 10% growth in EPS for 2014, DuPont shares may soar if it offers investors something as big next week. But chances are low, so shares could move the other way as well. It's a critical earnings report, so stay tuned for detailed analysis.
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