I think it's safe to say that the third-quarter earnings season has been rough on investors.
Since Alcoa (AA +0.00%) unofficially kicked things off two weeks ago with mixed results, the Dow Jones Industrial Average (^DJI +1.38%) has lost over 400 points. More than half of the decline occurred yesterday, as the blue chip index plummeted by 242 points following a string of poor earnings reports from the likes of DuPont (DD +0.00%), United Technologies (UTX 1.69%), and 3M (MMM +3.80%). But while all of these stocks were hammered, DuPont took the hardest hit by far, dropping more than 8%.
Why DuPont got crushed
Quite simply, DuPont got crushed because of its earnings release. For the quarter, the most valuable U.S. chemical maker reported adjusted earnings per share of $0.32 compared to the consensus estimate of $0.47. On the top line, the company reported $7.39 billion in net sales versus an expected $8.15 billion.
|
Metric |
Actual |
Estimate |
Year-Ago |
|---|---|---|---|
|
Revenue (billions) |
$7.39 |
$8.15 |
$8.12 |
|
Earnings per share |
$0.32 |
$0.47 |
$0.60 |
Sources: Bloomberg and DuPont's 3Q12 Earnings Release.
While I don't put a lot of credibility in the so-called consensus estimate -- at its core, the exercise is no more than a guessing game -- two factors stick out. First, DuPont didn't just barely underperform expectations, it did so by a long shot, suggesting that underlying demand is worse than predicted. And second, the truly troubling observation is the extent to which earnings and sales contracted relative to last year. Compared to the same quarter in 2011, earnings per share contracted by 47%, or nearly half, while revenues fell by 9%.
According to the company's chair and chief executive officer, Ellen Kullman, "Weaker-than-expected demand in titanium dioxide and photovoltaic markets contributed to the decline from last year's record third-quarter earnings. We are addressing these challenges now to position ourselves for improved performance." Among other things, Kullman said that DuPont will cut 1,500 jobs, or roughly 2% of its 70,000 workforce, and take additional cost-cutting measures to increase competitiveness.
Beyond this, the bigger catalyst for the massive drop-off in DuPont's share price was its tempered forward guidance. The chemical giant now expects full-year 2012 earnings from continuing operations to be in a range of $3.25 to $3.30 per share. Previously the company had pegged the range at $4.20 to $4.40 a share, and for all of 2011 it earned $3.55 per share.
Importantly, DuPont is merely one of many companies that are reporting similar predictions going forward. Among others, Alcoa, United Technologies, Intel (INTC +0.42%), Caterpillar (CAT +3.00%), and General Electric (GE +1.76%) have all moderated future expectations. For its part, Caterpillar's chief executive officer noted that: "The decline in the sales and revenues outlook reflects global economic conditions that are weaker than we had previously expected."
Does DuPont's hit make it a buy?
After shedding nearly 10% of its value over the last two days, it's hard to deny that DuPont looks attractive. It's now trading for a reasonable 12 times earnings and pays a whopping 3.5% dividend yield -- not bad when you consider that 10-year Treasuries are at 1.79%.
At the same time, however, there are at least three Dow dividend stocks that are even more enticing for investors in need of yield. If you're one of these, I encourage you to download our popular free report: "The 3 Dow Stocks Dividend Investors Need." You can access a free copy of this report instantly simply by clicking here now.
