Why Disappointing Numbers Have Re-affirmed my Positive View on this Stock
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Top line misses, but bottom line beats. Yearly guidance range is re-affirmed, but forecast is skewed toward the lower end. That sums up DuPont’s (NYSE: DD) second-quarter results, not for me but for everyone else. For I could actually see a handful of positives in its second quarter, enough to tell me this one’s not worth a miss.
DuPont’s agriculture division’s strong second-quarter performance didn’t come as a surprise. The quarter coincided with the peak planting season in the United States, and the fact that corn plantations were at record highs this year isn’t news anymore. Peer Monsanto’s (NYSE: MON) stellar numbers last month had already given us an idea of what to expect from DuPont. As was the case with the seed king, robust sale of corn and soybean seeds and traits drove DuPont’s ag division’s sales up by 13% from the year-ago period.
It would be wrong not to give credit to the huge array of new products DuPont had launched in March through its Pioneer Hi-Bred seed business to tap the upcoming planting season. In fact, an amazing 75% of the higher pricing DuPont can demand from the market is driven by the innovation its products offer—a fact that speaks volumes of the high quality of its products.
DuPont’s innovation will continue to be visible in its products lined up for the next few years. Some, like its pest-resistant soybean varieties to be out by 2014, are specially targeted at high-potential markets like Brazil. Most players, including Monsanto and Syngenta (NYSE: SYT) are betting big on the Latin American market, with DuPont expecting strong business from the region in the second half of the year.
Another market with immense opportunities is Africa. DuPont is stepping into it in a big way by partnering with seed company Pannar Seed—a move that must be giving sleepless nights to Syngenta, which dominates the market and was even eying Pannar to strengthen its foothold.
In fact, new products together with the emerging markets growth will be keys to DuPont’s ag business performance moving on. Sales from these markets were up 11% during the second quarter, and look set to climb higher as DuPont innovates and expands.
The white’s catching up
Sales in DuPont’s performance coatings and performance chemicals divisions didn’t really grow as I had thought, but remained almost flat as high prices offset low volumes. Higher prices have almost become a norm with titanium dioxide producers since last year when they aggressively started passing-on-the-buck to consumers. Yet, the good news is the sequential improvement in volumes, thanks to stability in end markets like automotive. Momentum is in fact picking up fast in markets like Asia, particularly China (yes, DuPont feels the Chinese government’s stimulus to boost consumption is working for the TiO2 market). These factors, along with shrinking industry TiO2 inventory levels, signal high chances of a bounce back.
Peer Huntsman (NYSE: HUN), which is about to report its second-quarter numbers next week, is also expecting better TiO2 volumes for the quarter. The company didn’t even rule out further price increases for the rest of the year. Interestingly, while many are predicting the TiO2 market to remain soft for long, the world’s largest TiO2 producer remains bullish. Not only does DuPont expect volumes to grow sequentially in the forthcoming quarters, it even expects its performance chemicals division margins for the full year to come in at the same level as last year (i.e., 25% as pre-tax operating income margin).
Things are looking up for DuPont's electronics and communications division as well. Though volumes remained soft compared to last year, they improved sequentially as I had expected. That demand for tablets and smartphones remained firm wasn’t a surprise, but the notable point was the improvement in photovoltaic materials volumes. Customer destocking was weighing heavily on the division’s margins lately, not only for DuPont but for peer Dow Chemical (NYSE: DOW) as well. But both companies witnessed an improvement (albeit slow) in volumes during their first quarters. The continuing recovery evidenced by DuPont’s second quarter only confirms what the company had earlier predicted—an end of the destocking phase—which is great news for both players.
My Foolish takeaway
Despite its bottom line beating estimates, economic headwinds and strong dollar prompted DuPont to expect its full-year earnings per share to come in at the lower range of forecast, at $4.20. Is that so worrisome? I don’t think so, because even $4.20 is roughly 7% more that what the company earned in 2011. And remember 2011 was a record year for DuPont, which means even if earnings hit the lower end, the headlines at the end of the day will be ‘DuPont Delivers Record Full-Year Earnings’! Now, given the global headwinds we are witnessing this year, if that isn’t commendable, what is?
The second quarter marked a full year since Danisco became a part of DuPont, and the journey can be termed successful. DuPont might have to work a lot to catch up with Monsanto, but its innovation and marketing strategies offer promise. With other businesses recovering, I don’t think DuPont will disappoint you in the longer run. I’ll soon give you more reasons why the company looks like a good package to me. To make sure you do not miss it, click here to add DuPont to your stock watchlist.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Nehams 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.