1 Reason DuPont Shares Could Crack This Week

DuPont (NYSE: DD  ) hasn't had a great start to 2014, with shares gaining just about 5% during the first quarter of the year. But that number looks good enough when you consider that shares of archrival Monsanto (NYSE: MON  ) lost 2% during the same period.

Ironically, while Monsanto surprised Wall Street with a good set of quarterly numbers earlier this month, analysts aren't too upbeat about DuPont, which is set to report its first-quarter earnings this Thursday. More notably, estimates also run higher for peers from the chemical industry, such as Huntsman (NYSE: HUN  ) , indicating the overall bearish stance that the market appears to have about DuPont. Will the company prove critics wrong this week or buckle under headwinds that could send its shares crashing?

Can it keep up with Monsanto?
The Street expects DuPont's first-quarter top line to remain flat year over year, and see its earnings per share improve marginally by about 2%. There are two things worth noting here: First, those numbers would be in sharp contrast to the 7% and 13% higher revenue and profit, respectively, that Monsanto reported for its last quarter. Second, and more importantly, analysts are pegging DuPont's non-GAAP operating earnings per share to improve 2% -- the company's GAAP earnings will likely be much lower.

Monsanto's soybean seed sales jumped 21% during its last quarter, while its corn seed sales improved only 4% year over year. That confirms how farmers in the U.S. are increasingly opting for soybeans over corn this planting season.

Roundup Ready 2 Yield soybeans. Source: Monsanto.

But while Monsanto still gains out of the shift toward soybeans, DuPont could end up getting hurt in the process. The reason is simple -- Monsanto's Roundup Ready soybean trait already covers 90% of the soybeans acres in the U.S.

That also explains why the Street has low hopes from DuPont, which relies heavily on its agriculture segment to drive growth on the top line. Under an agreement signed with Monsanto last year, DuPont was allowed to offer Roundup Ready 2 Yield soybeans beginning 2014. How far those plans will help DuPont will only be known when it releases earnings this week.

For now, DuPont investors have another reason to worry.

Why you shouldn't expect much
After a couple of quarters of strong growth in titanium dioxide pigment volumes, if you're expecting DuPont's performance chemicals business to show some strength in the upcoming earnings report, you should hold your excitement.

I'm expecting Q1 earnings from DuPont's performance chemicals business to be substantially lower year over year. TiO2 volumes may have improved in recent months, but prices remain under pressure, while input costs continue to stay firm. During its last earnings call, Huntsman mentioned how it expects the pigment market to normalize only during the second half of the year, and that any price increases that it plans to implement in 2014 would be during the latter half of the year.

Investors should keep an eye on DuPont's plans about price hikes in its upcoming earnings call, because until selling prices improve, TiO2 business will continue to be a drag on the company's top and bottom lines.

Added burden on profits
On a brighter note, things could be turning around for DuPont's electronics and communications business. Industry experts project 2014 to be a recovery year for solar photovoltaics market as demand and prices stabilize. Prices of key input, silver have also cooled down in recent months.

Likewise, DuPont's performance materials division -- which sells polymer-based products and contributed nearly 18% to its total revenue last year -- could see sales rising this year backed by stronger automotive and construction markets in the U.S.

But with two key businesses -- agriculture and TiO2 pigment -- on soft patch, I wouldn't be surprised if DuPont reports flat, or even lower, GAAP EPS for Q1. Remember, the company uses non-GAAP operating earnings to assess performance and guide into the future, so what you'll see in the headlines Thursday will not be the real profits.

DuPont continues to pay out claims against its discontinued Imprelis herbicide, has several pending litigations to deal with, and has been restructuring operations aggressively since several quarters. These extraordinary items don't go into operating earnings, hence giving a rosier picture of DuPont's bottom-line growth to investors.

What's more, DuPont also started paying out royalty, worth $200 million annually, to Monsanto beginning last quarter. That's an added pressure on the company's already vulnerable bottom line, which isn't good news for investors.

Foolish takeaway
Unlike Monsanto, if DuPont revises its 2014 guidance lower this week, investors could scramble to dump its shares. DuPont faces an uphill task ahead to turn its slower businesses around, while fighting stiff competition in its growing agriculture business. Investors should thus look for critical updates about the company's product pipeline, growth strategies, and cash usage plans for 2014 in its upcoming earnings call.

The cash part is important, since DuPont had outlined a big repurchase program some months back, which should have kicked off during the last quarter. While that means greater returns to shareholders, lower outstanding share count following buyback also tends to boost EPS. That isn't the kind of earnings growth you should be demanding out of DuPont as an investor, so stay cautious.

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Read/Post Comments (13) | Recommend This Article (2)

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  • Report this Comment On April 16, 2014, at 4:02 PM, funfundvierzig wrote:

    No doubt about it, with their suspicious change to NON-GAAP last year from GAAP, DuPont's customarily secretive and evasive Management will continue to try to camouflage their steady stream of substantial write-offs and write-downs and charges for regularly occurring "non-recurring" items.

    Part of the motivation for going NON-GAAP, in our opinion, was and is to take the attention off their multi-$billion blunder in DuPont AG chemicals, namely DuPont Imprelis. As many investors will recall over the past three years this falsely, if not fraudulently marketed "very environmentally friendly" dandelion treatment for the lawn proved to be an amazingly effective serial killer of mature landscaping trees. Hundreds of thousands of dead and damaged trees clear across the country triggered a tsunami of lawsuits, federal and state at great cost.

    ...funfun..

  • Report this Comment On April 18, 2014, at 10:31 AM, funfundvierzig wrote:

    Neha Chamaria, you were spot-on with your insightful precautions!

    ...funfun..

  • Report this Comment On April 18, 2014, at 4:57 PM, davidscott1 wrote:

    DuPont announced lower than expected financial results for first quarter FY14 largely because severe weather conditions depressed revenues from the DuPont’s all important agricultural business.

  • Report this Comment On April 18, 2014, at 5:25 PM, mikewatson021 wrote:

    DuPont reported revenues of $10.13 billion for the quarter, missing analysts’ estimates of $10.45 billion.

  • Report this Comment On April 18, 2014, at 5:27 PM, davidscott1 wrote:

    DuPont announced earnings of $1.58 per share, missing analysts’ expectations by one cent.

  • Report this Comment On April 18, 2014, at 5:30 PM, mikewatson021 wrote:

    DuPont’s Agricultural segment, which generates almost one third of the company’s revenues, was

    severely impacted by the shifts in the business.

  • Report this Comment On April 18, 2014, at 5:31 PM, mikewatson021 wrote:

    DuPont’s Agricultural segment, which generates almost one third of the company’s revenues, was severely impacted by the shifts in the business.

  • Report this Comment On April 18, 2014, at 5:33 PM, davidscott1 wrote:

    Harsh weather conditions depressed the DuPont agriculture segment’s profitability, causing the

    conglomerate to miss its earnings estimates.

  • Report this Comment On April 18, 2014, at 5:37 PM, mikewatson021 wrote:

    DuPont agriculture segment saw its revenues decline by 6% over the last year to come in at $4.39 billion

  • Report this Comment On April 18, 2014, at 5:42 PM, davidscott1 wrote:

    DuPont operating income decreased by 5% on a year over year basis to $1.44 billion

  • Report this Comment On April 18, 2014, at 5:49 PM, davidscott1 wrote:

    DuPont operating income decreased by 5% on a year over year basis to $1.44 billion

  • Report this Comment On April 18, 2014, at 5:53 PM, mikewatson021 wrote:

    DuPont performance chemicals business has been showing lackluster performance for the last few years due to depressed pricing of TiO2.

  • Report this Comment On April 19, 2014, at 1:50 PM, funfundvierzig wrote:

    Strangely, the same winter weather hit the customers of Monsanto and Syngenta as well. But, Monsanto reported robust gains in sales and earnings in its last quarter, and Syngenta, largest producer of ag chemicals in the world reported an increase of 5% in revenues in its first quarter.

    We believe the accountability-evasive Management of DuPont is hiding behind climate as an excuse for their dismal performance in DuPont AG. Seed sales dove, down 9%, and overall sales for DuPont AG were off 6%, 7% by volume. Operating earnings fell 5%.

    In short, DuPont was out-run by the competition. …funfun..

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