DuPont (DD) Q3 Preview: Another Earnings Beat Coming?

DuPontDD is gearing up to release its third-quarter 2016 results ahead of the bell on Oct 25.

The Delaware-based company's adjusted earnings for second-quarter 2016 topped the Zacks Consensus Estimate, aided by its aggressive cost-reduction actions. The company saw higher profits across its operating segments in the quarter. Revenues declined year over year on pricing pressure and currency headwinds, but beat expectations.

DuPont has beaten the Zacks Consensus Estimate in all of the last four quarters with an average beat of 17.53%.

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

Factors to Watch For

DuPont, in its last earnings call, raised the bottom end of its adjusted earnings guidance range for 2016 by 10 cents per share to $3.15-$3.20. For the third quarter, DuPont expects adjusted earnings per share to be 50% higher than the previous year.

DuPont's cost-saving and productivity measures should continue to lend support to its earnings in the September quarter. The company is taking aggressive cost-cutting actions amid a still challenging operating backdrop.

The company's 2016 cost savings and restructuring program, which builds on its operational redesign initiative, is expected to deliver net cost reductions of $730 million in 2016. The company expects to achieve around 64 cents per share in cost reductions in 2016 through its global cost savings and restructuring program.

However, DuPont is exposed to certain challenges that could affect its third-quarter results. As the company derives more than 60% of its sales from overseas markets, currency headwinds may continue to weigh on its top line. DuPont sees unfavorable currency impact of 15 cents per share on its 2016 operating earnings. The expected impact is, however, lower than the company's prior view of 20 cents per share. Headwinds from a higher base tax rate are also forecast to be roughly 10 cents per share.

Moreover, DuPont still faces challenges from weak agricultural market conditions. Abundant seed and crop protection inventories and tight credit conditions are affecting this major market. Moreover, costs associated with the launch of the Leptra technology in Brazil are expected to weigh on earnings in DuPont's agriculture business in the third quarter.

DuPont is moving ahead with its planned mega-merger with Dow Chemical DOW . DuPont and Dow agreed to combine their businesses in Dec 2015 in an all-stock deal to create a chemical powerhouse (dubbed "DowDuPont") with a combined market value of around $130 billion, before eventually breaking up into three independent companies through tax-free spin-offs.

The combined company would split into pure-play agricultural, material science and specialty products businesses that will be leading players in their respective fields. The breakup is expected to take place 18-24 months after the completion of the deal.

The deal secured approvals from shareholders of both companies in July and is now subject to customary closing conditions including receipt of regulatory clearances. The European Commission (EC), in August, started a Phase II review for the planned merger of equals of the two companies.

The proposed mega-merger is projected to deliver cost synergies of around $3 billion, expected to be achieved with the first two years after the deal closure. Around $1 billion of additional growth synergies are also expected to be achieved from the merger.

Both companies expect the merger to enhance their growth profiles through expanded scale and complementary offerings (especially in agriculture) and drive shareholder value. We expect DuPont to provide an update on the planned merger in its third-quarter call.

DU PONT (EI) DE Price and EPS Surprise

DU PONT (EI) DE Price and EPS Surprise | DU PONT (EI) DE Quote

Earnings Whispers

Our proven model shows that DuPont is likely to beat earnings because it has the right combination of the two key ingredients.

Zacks ESP: The Earnings ESP for DuPont is +9.52% as the Most Accurate Estimate stands at 23 cents while the Zacks Consensus Estimate is pegged at 21 cents. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: DuPont currently carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings.

Conversely, sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement.

The combination of DuPont's Zacks Rank #3 and positive ESP makes us reasonably confident of an earnings beat.

Stocks That Warrant a Look

Here are some stocks in the basic materials space that you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

The Chemours Company CC has an Earnings ESP of +25.71% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

Teck Resources Limited TCK has Earnings ESP of +4.55% and carries a Zacks Rank #1.

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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 Nasdaq, Inc.

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

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