On Oct 24, we reaffirmed our Neutral recommendation on chemical giant DuPont (DD). While we remain encouraged by strong momentum in its agriculture business, significant currency headwind, raw material costs pressure and a challenging operating backdrop in Europe keep us on the sidelines.
Why Kept?
DuPont, on Oct 22, posted mixed third-quarter 2013 results with adjusted earnings topping the Zacks Consensus Estimate while sales missing the same. Consolidated profit, as reported, rocketed year over year as healthy gains across the company’s electronics and performance materials businesses and lower tax offset weakness in its performance chemicals unit. DuPont backed its earnings guidance for the full year.
DuPont is witnessing strength in its agriculture business, reflected by higher corn seeds and crop protection sales. Despite higher input costs, the Agriculture segment saw double-digit rise sales in the third quarter boosted by higher volume and strong performance of the crop protection business, aided by the company’s acquisition of a majority stake in Pannar Seed (Pty) Limited.
A strong start in the North American growing season is boosting the agriculture business. DuPont is seeing healthy demand for its corn hybrids and expects continued strong growth in crop protection driven by new products. DuPont has numerous new products in its pipeline that are expected to create value for its customers.
Moreover, DuPont is focused on an aggressive cost-cutting strategy by reducing fixed costs, restructuring work schedules and improving working capital productivity. The company also has a healthy balance sheet and remains committed to boost shareholder returns.
However, DuPont is exposed to significant currency headwinds and higher energy and raw material costs. Given a strengthening dollar versus most currencies, DuPont now expects negative currency impact of 18 cents per share on its earnings for 2013, higher than its prior-expectation of 12 to 14 cents per share.
DuPont’s performance chemicals business was a weak spot in the third quarter. Demand of titanium dioxide (TiO2), which is used to give paint and other coatings a white hue, remains weak, partly due to challenging economic conditions in Europe. Lower TiO2 pricing hurt the results in the performance chemical business in the third quarter. DuPont’s Board recently approved the spin off of the struggling performance chemicals unit.
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Other Stocks to Consider
Other companies in the chemical industry worth considering include Air Products & Chemicals Inc. (APD), FMC Corp. (FMC) and Huntsman Corp. (HUN). All of them carry a Zacks Rank #2 (Buy).
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