In a report published Wednesday, Deutsche Bank reiterated its Buy rating on DuPont (DD), and slightly raised its price target from $54.00 to $55.00. As an investor I always like to understand why certain analysts take positions. Sometimes it tells me something but other times it may not. In this case, I believe I have found a good reason to invest in DuPont in 2013. What is Deutsche Bank's reasoning behind its "Buy" rating?
Ag momentum offsetting TiO2 weakness creates a 20% upside to our SOTP value. Buy. Investors were focused on a few things, especially these comments by management: on Ag (gaining share in Brazil corn, strong US order book) TiO2 (potentially bottoming) in 1H13. While 1H13 earnings will be down ~5% YoY due largely to TiO2 we note that TiO2 weakness has been well flagged for several quarters and has a small impact on valuation as investors attach a low multiple to its earnings With Ag momentum improving, TiO2 a modest 8% of earnings in '13E and our SOTP yielding a $57 value, upside of 20% (with < $3, or 4%, from TiO2), we reiterate our Buy rating.
Fourth-quarter sales were good, up 18% while volume was up 11%. Some of the reasons for a good fourth quarter like crop protection, and growth in Latin America will carry over into 2013 and this is a good reason to consider investing in DuPont in 2013. Fourth-quarter sales in Latin America were $771 million and this is up 24% as Brazil led the way with a strong summer corn crop. Agriculture is what will lead DuPont in 2013. I believe "Crop Protection" and "Seed Pricing" specifically will have the greatest positive impact!
Crop Protection Price Increases for 2013
Solid Ag environment and continuing momentum of seed and crop protection businesses will drive significant sales increases in the first half of 2013.
Crop protection costs (not bundled with seed), was forecast to rise in 2013 for corn and soybean.
- Herbicides - prices rose slightly in 2012, but are expected to increase from 1% to 4% this year.
- Pesticides - costs are expect to rise about 1% this year.
- Insecticides - corn insecticide costs are supposed to rise for 3% to 5%, which is not out of the ordinary. Prices have average a 3% increase since 2006.
- Fungicides - this has increase the most over the last 7 years with an average increase of 7% and a 9% increase last year. The good news is though that this year the increase is not expected to surpass 3%.
The general thinking behind these increases is that they follow after higher crop prices and farm incomes. DuPont provides products for crop protection worldwide for corn, soybean, fruits, vegetables, wheat, cotton, rice and much more. Latin America was a big leader here for DuPont in 2012 and will continue to be in 2013. Crop Protection, sales for the quarter of $764 million outpaced the market by 13% lead by Latin America's use of insecticides and herbicides. Herbicides were also the big money maker in North America.
Input Costs Rise for Seeds
DuPont's first-half earnings are expected to increase moderately but margins will be pressured slightly from higher seed input costs
Putting seeds into the ground this year will increase in price. Not only are fertilizer prices on the rise, but so is seed fuel. These increases are minimal though compared with seed price increases. What are the reasons for the increase in seed prices? First of all, advances in genetic technology are a regular culprit. This is especially true when we refer to corn and soybeans. Producers have been transitioning to genetically modified seed types since the early 2000s and these are more expensive than non GMO seed types. This has sent the price of seeds up every year. Secondly, the drought last year is the second year the Corn Belt has had a difficult growing season. So seed supplies could be tight and this will raise prices. Seed corn could increase in price by up to 7%, and soybean seed could cost you 10% more than a year ago. Providing seed and crop protection products will benefit DuPont this year.
Since mid November and into early December the stock built a base and finally started to move up, advancing about 9.4% in value since then. How strong is the present move up? It continues to use the middle Bollinger Band as support and this makes the move very strong. Recently it touched the middle band and has since started up again. Its strength is sported by the RSI indicator; as the low at the middle band did not even register as low as the '50' market on the indicator, this still shows strength. It does not look like the MACD is coming down soon either but will continue to move well above the '0' line. This move still looks like it has legs to it.
Agriculture will be a strong driving force in early 2013 for DuPont as revenue is expected to increase because of significant sales influenced by volume and price. By year's end, sales are expected to be in the low teens with slight margin challenges. Commodity prices are expected to increase and weather has yet to rear it ugly head to influence crop production and outcome. I believe the Ag business is where DuPont's success will come from in 2013 and it is a good reason to consider the company as a good investment.