DuPont and Dow Chemical Playing the Same Hand Differently

The agriculture segments for DuPont and Dow Chemical Company are sources of great potential growth for each company. Is the future of agricultural technology promising enough to replace a long history in the broader chemical business?

Shamus Funk
Shamus Funk
Apr 28, 2014 at 3:06PM
Energy, Materials, and Utilities

The two largest chemical companies in America, Dow Chemical Company (NYSE:DOW) and DuPont (NYSE:DD), are heading in very different directions even though they share very similar starting points. Recently reported first quarter earnings provide insight into why each company is paving its own particular path, and the earnings may also offer a little foresight into how clear the path will be for each company moving forward.

First quarter earnings
Dow reported first quarter adjusted earnings of $0.69/share, amounting to a 14% increase from first quarter 2013. The earnings beat was achieved through expanding margins and increased earnings in all but one of the company's six operating segments.

DuPont reported first quarter adjusted earnings of $1.54/share, which amounted to a 5% increase from first quarter 2013. Operating margins increased in six of the company's seven operating segments, while earnings increased in five of the seven operating segments.

Chemical companies in agriculture
The operating segments for each company show just how similar in nature Dow and DuPont truly are. Common operating segments include electronics, agriculture, specialty chemicals, and bioscience, though assigned different official names internally.

The largest disparity in the earnings reports of the two companies came from the segment where the companies seem to be most focused in their forward-moving approach. Amidst the same planting, weather, and economic conditions as their competitor, Dow and DuPont saw their agricultural segments performing very differently from one another. Dow's agricultural segment achieved record first quarter sales, record EBITDA, and significant margin expansion.

DuPont's agricultural segment, on the other hand, saw declining sales and earnings versus first quarter 2013. Both companies referenced the same challenges including a late start to the North American planting season, but Dow was able to overcome the seasonal and timing fluctuations intrinsic to the agriculture industry through increased herbicide sales in Europe, the Middle East and Africa while DuPont couldn't quite compensate for the late North American season despite increasing margins in seeds.

As DuPont shifts evermore toward agriculture and completes the spinoff of its long-established chemicals business, the company and investors alike will still need to accept earnings dependent more on season than on sales. Reducing volatility was one of the main reasons for the separation of DuPont's performance chemicals segment into a new company, but the agriculture industry, though less likely to see the complete drops in prices and radical shifts in inventory as seen in performance chemicals, is still unpredictable from quarter to quarter or season to season.

The takeaway
The 'difficulties' in DuPont's agriculture segment from this quarter's earnings are not indicative of a failure in their operations, rather just a temporary shift on the balance sheet due to the timing of seed shipments from quarter to quarter. Both DuPont and Dow are seeing expanding margins in agriculture, and DuPont sees this as a strong opportunity for growth moving forward.

Dow is likewise investing heavily into its AgroScience division, though seemingly not at the expense of its strong base in chemicals. Moving forward, DuPont is turning into a more pure play in agricultural technology, akin to Monsanto, while Dow is growing more into agriculture while holding tight to its established chemicals business.

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Both companies will see bumps along the path due to the natural volatility in both chemicals and agriculture, but both industries are primed for long-term growth. The better play of the two depends on whether one views chemicals as a liability or as a stabilizing opportunity.