Will DuPont (DD) Surprise This Earnings Season? - Analyst Blog

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DuPont ( DD ) is set to release its second-quarter 2014 results before the opening gong on Jul 22.  

In the last quarter, the chemical and industrial products giant delivered a 1.25% negative earnings surprise as harsh winter weather coupled with a shift in timing of seed shipments and lower corn planted area in the Americas hit its core agriculture business in the quarter. Costs associated with the separation of the company's performance chemicals business also weighed on its bottom line. 

Let's see how things are shaping up for this announcement.

Factors to Consider this Quarter

DuPont, last month, said that it sees adjusted earnings in the second quarter to be modestly below $1.28 per share earned a year ago. Based on that, it reduced its adjusted earnings guidance for 2014 to between $4.00 and $4.10 per share from $4.20 and $4.45 per share expected earlier. The outlook reflects weak performance in its agriculture business.

In the agriculture unit, sales of corn seeds are below the company's expectations while seed inventory write-downs are higher than what was expected earlier. While sales volumes of soybean in North America are higher than expected, it will not fully neutralize the decrease in corn volume. DuPont also noted that crop protection herbicide sales were below its expectations, mostly due to extreme winter weather.   

Although favorable seed pricing and lower input costs should support margins, lower-than-expected planting activities across North America and Brazil are expected to hurt volumes for first-half 2014.

Moreover, DuPont's performance chemicals business remains a weak link. Demand of titanium dioxide (TiO2), which is used to give paint and other coatings a white hue, remains soft. 

While DuPont is spinning off the struggling performance chemicals unit (expected to close by first-half 2015), lower-than-expected selling prices in refrigerants for mobile and stationary applications, weak TiO2 pricing and cost related to the separation are expected to drag earnings for the division in the second quarter. Weak TiO2 pricing is expected to remain a headwind in the near term.

DuPont also expects to take a restructuring charge of roughly $270 million (before tax), or 20 cents per share, post tax, in the second quarter associated with actions to support its more focused portfolio of businesses following the spinoff of the performance chemicals unit.

Nevertheless, DuPont should benefit from its aggressive cost-cutting initiatives. Meaningful cost savings from its restructuring and productivity improvement actions are expected to support its margins this year.

We also expect DuPont to provide some color on the market traction of its newly launched Encirca services platform for farmers in the U.S. Encirca, which marks an expansion to DuPont's whole-farm decision services offerings, is expected to offer significant opportunity in the long run and deliver annual peak revenues of more than $500 million. 

Earnings Whispers

Our proven model does not conclusively show that DuPont is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: ESP for DuPont is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at $1.18.

Zacks Rank #4 (Sell): DuPont's Zacks Rank #4 when combined with an ESP of 0.00% makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other chemical stocks you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

LyondellBasell Industries NV ( LYB ) has earnings ESP of +3.13% and sports a Zacks Rank #2 (Buy). It will report its second-quarter results on Jul 25. 

Albemarle Corporation ( ALB ) has earnings ESP of +0.92% and retains a Zacks Rank #3 (Hold). It will report on Jul 30.

Eastman Chemical Co. ( EMN ) has earnings ESP of +0.54% and holds a Zacks Rank #3 (Hold). It will report on Jul 28. 


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: EI , DD , EMN , ALB , LYB

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