Will DuPont (DD) Surprise This Earnings Season?

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.