This Dog of the Dow's Ride: Q4 Earnings Preview

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The chemical industry had a mixed 2012. Where some companies experienced capital appreciation over 50%, others could not even manage a positive return for the year. Therefore, that company ended up becoming a Dog of the Dow for 2013. Yes, you know I am talking about E.I. du Pont de Nemours and Company (NYSE: DD). DuPont fell by 3% in 2012.

The 3.66% dividend yielder historically holds its investor day in the second week of December.  This day gives investors a glimpse into how the company is going to perform in the upcoming year. This year DuPont announced several updates and measures regarding the upcoming quarter and 2013 fiscal year:

1)    2012 Guidance Update: DuPont updated its 2012 guide to be towards the high end of the previously-announced range of $3.25-$3.30. The company now expects EPS of $3.29 for the year. This translates into 4Q EPS of 7 cents. 

2)    Changes to reporting: Beginning in 2013, DuPont will begin reporting “operating earnings” (defined as GAAP operating earnings – significant items and OPEB (Other Post-Employment benefit costs). At September 30, 2012, OPEB costs stood at approximately 36 cents per share.

3)    Initial Indications on 2013: Earnings are expected to grow in the low-to-mid single digits with sales growing slightly lower, in the low-single-digit range. The company expects headwinds in the Performance Chemicals department, but mid-teens percent earnings growth is anticipated for the remainder of DuPont’s businesses, largely led by agriculture (discussed below).  

Using a company-provided guide of 2012 EPS, its OPEB costs for 2012 and an annual growth rate for earnings, we can calculate the EPS for 2013.

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Segments Preview


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The company makes its revenues from the following streams:

I.    AgricultureThis segment displays strong fundamentals. The pioneer seed is expected to show strong volume growth due to Southern Hemisphere planting season

II.    Industrial Biosciences / Nutrition & Health:  Both segments promise continued growth in the near-term. Both segments have been benefited by Danisco acquisition (a company that provides food ingredient solutions) executed last year.

III.    E&C: The Photovoltaic installations are expected to be flat vs. 2012. However, the strength in smart-phones will help to offset the softness in other markets.

IV.     PM: The increased demand in the automotive market will help the segment to post solid results.

 V.    PC: This segment will remain challenged in 2013 given a low demand for titanium dioxide and fluoropolymers.

4)    Share Repurchase: DuPont announced the authorization of a $1B share repurchase program. The program is to be completed in 2013 and is subject to the close of the Performance Coatings divestiture. After completing the $1B share repurchase program, DuPont has openly communicated its intent to deploy a portion of its proceeds towards the balance sheet (i.e. debt pay down to maintain its credit rating).  DD has indicated that it believes the deal will close in Q1 2013.  If it buys back stock at an even clip for the remainder of the year, at $44 per share, it would reduce shares by 22 million (which mean approx. 2.5% of total outstanding float).  

Other players 

In this context, PPG Industries and Dow Chemical (NYSE: DOW) need a special mention. PPG reported a strong fourth quarter on January 17 which has raised market’s expectations for DuPont. Both these companies fight fiercely in the performance coatings market. With a housing recovery around the corner, let’s see who wins more sales.

Dow has a solid dividend yield of 3.79%. It is also a company that is expected to benefit from the US housing recovery. Moreover, Dow has been an ideal shale gas play. The company has largely benefited from the rising ethylene margins as ethane prices collapsed in 2012. However, for the future, the sell-side believes that the ‘shale supremacy’ has been priced in the stocks.

Importance of TiO2 and Conclusion

The share repurchase news for DuPont has been considered positive by the market.  The announced accounting changes will also help add significantly to the EPS number that DuPont will use in communicating with the Street.  Overall, though, unfair or not, in these markets the near-term call on DuPont is largely based on the direction of TiO2.  DuPont laid out a middle case where TiO2 struggles early in 2013 then stabilizes in the heavy volume months of spring and summer.  While some improvement is definitely expected, there is also a risk for continued slippage in the back half of 2013 during the seasonally weak demand period.  As such, if investors are ahead on TiO2, they will ultimately get DuPont right.

Let’s see what the company has to announce on its 4Q earnings release to be held on January 22.

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