Why This Dow Stock Could Fall Further

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

DuPont’s (NYSE: DD) third quarter was a complete bummer. Yet, I wasn’t as surprised by the miserable numbers, and thought the market might just have over reacted a bit (the stock lost over 9% in a single day).

But that’s not to say I expect a wild upswing in DuPont’s numbers or its share price in the near term. Headwinds remain, and some facts from the third quarter tell me the next couple of months could be as tedious for the company (and its stock).

Why the Panic?

DuPont’s agriculture division was the shining star in its third quarter, with sales improving 4% from the year-ago period when other businesses failed to deliver. But most I know thought it was a bad number, thus the disappointment. Sorry, but I beg to differ here.  

Knowing that the period between June to September is typically one of the weakest for agricultural sales (as the Latin American planting season picks up only from October while the U.S. spring planting season is still several months away), DuPont couldn’t have done any better in its third quarter.

Take a look at how seed king Monsanto’s (NYSE: MON) last-quarter sales slipped 10% on weak demand, again largely due to the seasonality factor. Let’s also not forget that back in July, DuPont had already sounded the warning bell on “large seasonal losses” from its agriculture business for the latter half of the year. So where did the high expectations come from in the first place?

Patience is the Key Here

As I had expected, Latin America saved the day for DuPont. The nation is gearing up for record crop planting this year, and a strong start to the season was expected. It helped DuPont, as it did Syngenta (NYSE: SYT), which also reported its third-quarter numbers some days back. The latter’s sales from the region were up an impressive 18% in its third quarter, playing a key role in driving up its top line by 6% compared to the year-ago quarter. Syngenta derives more than a quarter of sales from this region, nearly 70% of which comes during the second half of the year.

Going forward, it thus won’t be wrong to expect sales from DuPont’s agriculture unit to improve both sequentially as well as year-over-year in its fourth quarter as demand picks up in the southern hemisphere. But that comes with a pinch of salt – high costs and investments in new launches might cut into revenue growth, thus widening operating losses and hitting DuPont’s bottom line. The skies will only get clear as we approach the U.S. planting season, which is when I think DuPont’s agriculture business sales will truly gather steam (stock prices could follow suit).  

No End to Woes

What actually turned DuPont’s third-quarter into such a big disaster was its second-largest business, performance chemicals – sales plunged 19% as demand for key pigment titanium dioxide (TiO2) dwindled. Again, I knew this was coming, because nothing seems to be in favor right now. Demand from key markets like Europe and Asia Pacific remain feverish, prices of TiO2 are nowhere near the highs they were this time last year, and input costs have shot up.

It can’t get any worse, nor will things improve so soon. Peer Huntsman (NYSE: HUN) feels inventory levels in the industry are still at uncomfortable levels, and cheaper Chinese substitute products are posing further challenges for TiO2 producers. Huntsman also expects cost pressures to build up further in the near months, so much so that it projects low selling prices and high costs to dent its TiO2 margins by $350 per ton in its third quarter. My eyes are fixed on the company as it checks in with its numbers in a week’s time.  

Ironically, DuPont was the only one that predicted the TiO2 market to pick up in the second half of the year even as peers remained cautious. Sorry DuPont, but you seem to have pressed the optimism button a little too soon, not just for performance chemicals but for the electronics business as well.

Weak Signals

Customer destocking made it tough for companies like DuPont and Dow Chemical (NYSE: DOW) to maintain their respective electronics business’ margins in the past few quarters. But while Dow believes the destocking phase won’t be over before the fourth quarter, DuPont had already predicted the end as early as the second quarter. The verdict – DuPont was far from being right. The electronics and communications business was DuPont’s worst-performing division in the third quarter, with sales tanking by a whopping 28%. Comparatively, third-quarter sales for Dow’s similar business, electronic and functional materials, declined 8% from the year-ago period. While tablets and smartphones sales remained strong for both companies, demand for photovoltaic materials and semiconductors fell.

DuPont’s miserable third-quarter numbers only confirm how weakness persists, and as long as markets like Asia Pacific remain weak, I won’t expect this business to bounce back.

Potholes Aplenty

Clearly, it’s a tough road ahead, which is why DuPont not only cut its full-year earnings guidance but also lined up drastic cost-cutting measures that include 1,500 lay-offs. It has company though, as Dow Chemical braces to eliminate nearly 2,400 jobs in the near future.

As if a trying business environment wasn’t enough, DuPont keeps getting those out-of-the-blue blows that only make things worse – in the latest one it has to cough up $1 billion to Monsanto against a lost lawsuit. DuPont is appealing against the verdict, but given Monsanto’s strong stance, the outcome could be really painful for the chemical maker. Remember, DuPont is still paying claims for its banned herbicide Imprelis, and such additional charges do nothing but weigh down on margins and reputation. Cost savings from restructuring won’t really help if financial statements have to consistently bear the burden of ‘claims charges’ and ‘litigation settlements’.

My Foolish Takeaway

I am not ruling out further downside in DuPont’s stock, but I am not striking it off completely from my investment list either. Quite a few things make it worth a look for the longer run, like its superb dividend-paying history and handsome dividend yield of 3.8%. Its focus on agriculture and wise restructuring moves have also caught my attention. To make sure you do not miss it, click here to add DuPont to your personalized stock watchlist.

Check This Out

On days like this, a dividend looks like an investor's best friend. Even when the market tanks, you can still count on getting those quarterly checks in the mail, and lower share prices mean you get a better yield and can reinvest those payouts more cheaply. To help steer you in the right direction, the Fool has prepared a special free report with our dividend picks in the Dow. These aren't necessarily the biggest yields, but these companies all have the product breath and international penetration to keep growing and delivering market-beating returns to shareholders for decades to come. To get your free copy of this report, "3 Dow Stocks That Dividend Investors Need," just click right here now.


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 Monsanto Company. 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.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure