DuPont (DD) Warms Up for Q4: Will It Beat Earnings Again? - Analyst Blog

DuPont ( DD ) is set to release its fourth-quarter 2014 results ahead of the opening gong on Jan 27.

The chemical behemoth's adjusted earnings for the last quarter beat the Zacks Consensus Estimate and also came ahead of the year-ago earnings. Healthy earnings across its Nutrition and Health and Safety and Protection divisions masked continued weakness in its core agriculture business. The company saw higher margins across five reporting segments in the quarter, aided by its cost improvement actions.

DuPont is facing increased pressure from Nelson Peltz's Trian Fund Management after the latter recently announced its plans to nominate four directors to the company's board, launching one of the biggest activist-investor led proxy battles in recent times. The move to secure board seats represents a fresh attempt by the renowned activist investor to break up the 200-plus year old company.

Trian, which is one of DuPont's biggest shareholders, earlier pressed the company for breaking itself up into two distinct companies citing that its current conglomerate structure and flawed business plans are destroying shareholder value. However, DuPont have been actively shielding itself against such breakup calls while remaining focused on executing strategic actions including portfolio optimization, disciplined capital allocation and cost control.

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

Factors to Watch For

DuPont, in its third-quarter call, said that it sees sluggish global economic growth in the fourth quarter coupled with currency headwind and sustained weakness in its agriculture business. However, the company expects adjusted earnings per share for the quarter to rise roughly 20% from 59 cents per share it logged a year ago.

DuPont sees gains in both sales and operating earnings across its nutrition and health, industrial biosciences, safety & protection and performance chemicals franchises in the December quarter. Revenues are expected to fall in the electronics and communications unit on pricing pressure while remaining flat in the performance materials business due to portfolio changes.

For the agriculture business, operative environment is expected to remain challenging in the fourth quarter as farmer net income and corn planted area will continue to be under pressure globally. Sales from this business are expected to be flat in the quarter.

DuPont remains on track with the spin off of its struggling Performance Chemicals division (expected to close by mid-2015) to create a new entity called 'Chemours'. Demand of titanium dioxide (TiO2), which is used to give paint and other coatings a white hue, remains soft.

DuPont is also faced with currency headwinds with unfavorable currency swings are expected to affect its earnings by at least 5 cents per share in the fourth quarter.

Nevertheless, DuPont should gain from its aggressive cost-cutting initiatives. Meaningful cost savings from its restructuring and productivity improvement actions are expected to support its margins in the fourth quarter.

We also expect DuPont to provide an update on its company-wide redesign actions to support its more focused portfolio of businesses following the spinoff of the performance chemicals unit. Cost savings of at least $1 billion is expected through its redesign initiative.

Earnings Whispers

Our proven model does not conclusively show that DuPont is likely to beat the Zacks Consensus Estimate in the fourth 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 71 cents.

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 companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Trecora Resources ( TREC ) has an earnings ESP of +5.00% and holds a Zacks Rank #2 (Buy).

Cytec Industries Inc. ( CYT ) has an earnings ESP of +6.56% and carries a Zacks Rank #3 (Hold).

Compass Minerals International Inc. ( CMP ) has an earnings ESP of +2.60% and carries a Zacks Rank #3 (Hold).

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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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