This Chemical Stock Deserves to be on Your Radar
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The record U.S. planting season might be well behind us, but its benefits won’t stop spilling over so soon. After Monsanto’s (NYSE: MON) stellar third-quarter results last month, it’s time for chemical major DuPont (NYSE: DD) to steal the show next week. Dupont and planting? Yes. DuPont is fast emerging as an agricultural play since it acquired food company Danisco last year. And this is what I feel will be the key to strong second-quarter results slated to release next Tuesday.
The green magic
A record first quarter was possible for DuPont thanks largely to its agriculture division’s solid performance. Unusually warm weather encouraged farmers to get their planters out early, pushing up seed and nutrient sales—a fact reflected well in seed giant Monsanto’s impressive second-quarter numbers.
But remember the planting season was yet to fully take off then. What followed was music to the ears of agricultural companies. As predicted by the U.S. Department of Agriculture, U.S. corn plantations indeed hit record highs this year. This means that the real benefit of strong plantations should be reflected in DuPont’s second quarter, as was the case with Monsanto, which rocked the Street last month with excellent third-quarter numbers. Not to forget how DuPont's seed business Pioneer Hi-Bred had launched more than 150 new hybrids and refuge products in March alone to tap the opportunity.
These factors, together with the fact that agriculture accounts for more than a third of DuPont’s top line, encourage me to raise the bar for the company’s second-quarter results—so much so that I feel its top-line growth has a good chance to climb over analyst estimates of 9.6%.
Goodness all the way
My outlook isn’t rosy for DuPont’s agriculture business alone. I am expecting its other key divisions—performance chemicals and performance coatings—to come up with good numbers too. Demand for key pigment titanium dioxide continues to remain strong. Peer Huntsman (NYSE: HUN) earlier forecasted its price increases to have good support from higher volumes in its second quarter. It even mentioned how price increases could continue through the year.
I am expecting something similar from DuPont. With end markets (primarily automotive) improving and TiO2 inventory levels shrinking, DuPont’s second-quarter sales should be up for these divisions. It will also be interesting to see what the world’s largest TiO2 producer has to say about the pigment market for the rest of the year when many are predicting softness to persist.
Look out for…
I’m also keen to see the situation in DuPont’s electronics and communications division. Destocking by customers took a toll on not just DuPont’s, but also on peer Dow Chemical’s (NYSE: DOW) related division’s margins in the past few quarters. Although volumes in this division are likely to be lower for DuPont in the second quarter on a year-over-year basis, I am expecting a marked improvement sequentially. That’s because volumes had shown clear signs of a bounce back in both DuPont’s and Dow’s respective last quarters. If the destocking phase has indeed come to an end as predicted earlier by DuPont (something the upcoming earnings call should talk about), it will be great news.
Apart from numbers, a major achievement that should find mention in DuPont’s upcoming earnings call is the approval its Pioneer Hi-Bred seeds business won from South Africa allowing it to partner with seed company Pannar Seed. The deal, once completed, will help DuPont gain traction in a high-potential market that could be worth $7 billion. Peer Syngenta (NYSE: SYT), which already derives a major chunk of revenue from this region, was reportedly keen on partnering with Pannar to strengthen its foothold in Africa. Now that DuPont has arrived, how competition unfolds in the market should make for an extremely interesting watch.
I’m also looking forward to some insight into DuPont’s next "solar" plan after having recently completed its $295 million solar panel capacity expansion program. Leading solar companies are joining hands with DuPont to promote solar energy—an area where the company is keen to make a mark.
Foolish final thoughts
Low natural gas (a key input) prices should act as icing on the cake in DuPont’s second quarter. If only it could get a hold over its ever-pending complicated cases with Monsanto and ugly lawsuits like the one related to the recent infamous herbicide case (you’ll see related claim charges in the second-quarter results), DuPont would be a dream company to own.
DuPont reaffirmed its earnings guidance for the full year last time, and chances of the company meeting it as well as impressing the Street next week seem high—just what its stock needs to regain some of the value lost in the past three months. Keep watching this space closely for a detailed analysis of DuPont’s earnings.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Syngenta. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.