DuPont - The Latest Profit Warnings Just Show The Need For Restructuring

| About: E. I. (DD)


DuPont issues a modest profit warning for 2014.

The warning once more underlines the need for focus and speeding up of the transformation process.

Shares offer appeal for dividend collectors, yet long term track record and appeal is modest.

DuPont (NYSE:DD) issued an unexpected profit warning on Thursday after the market close which send shares more than 3% lower on Friday. This is after shares were trading down by some 5% halfway during the trading day.

Last week's profit warning is not unexpected in the slow moving transformation process of the company. DuPont continues to pay out appealing dividends, yet I don't see much additional appeal on top of that.

The Profit Warning

DuPont is seeing a worse than expected second quarter and full year performance for 2014 on the back of a disappointing performance in its agricultural as well as Performance Chemicals business.

Adjusted earnings are seen moderately below operating earnings reported at $1.28 per share last year. For the full year of 2014, operating earnings are now seen between $4.00 and $4.10 per share. Previously the company guided for earnings of $4.20 to $4.45 per share.

Lower corn seeds sales and higher than anticipated corn seed inventory write-downs are the reasons behind the shortfall in the agricultural segment, only partially offset by strength in soybeans. Lower than anticipated crop protection herbicide sales thanks to weather circumstances have not been helpful either.

Within performance chemicals the shortfall in performance is attributed to lower selling prices in refrigerants for mobile and stationary applications.

Update On The Redesign Initiative

On top of the profit warning, DuPont provided more information on the business following the separation of the Performance Chemicals business which is still expected to occur by mid-2015.

This separation move will eliminate costs as productivity is anticipated to improve thanks to a greater operational focus. Furthermore a redesign of the entire infrastructure of DuPont with a focus on automation should result in lower-cost systems. The redesign initiative aimed to streamline operations will result in a $270 million pre-tax charge in the second quarter of this year. Additional charges might be incurred related to further actions which are anticipated along the way.

DuPont anticipates to save a billion per annum in 2019 compared to the 2013 base period on the back of the additional cost savings and the positive effects from separating the Performance Chemicals business. About two-thirds of these savings are anticipated to be realized by the end of 2015.

Investor Update

Back in May, DuPont held a big investor presentation at Sanford Bernstein's strategic decisions conference. The company likes to present itself as a ¨science¨ business operating in a wide variety of businesses including agriculture, nutrition & health, industrial biosciences, electronics and communications, performance chemicals, performance materials and safety & protection.

This diversification is essentially also DuPont's problem as it lacks focus and scale while pure players are gaining market share in many of its sub-segments.

As such the firm has set three strategic priorities which include the focus on agriculture & nutritional, biobased materials and advanced materials. This should lead to an acceleration of growth and increase in the value being added by the company. Innovation, a global reach and strong execution should allow for the achievement of these objectives.

DuPont is already making some progress versus these objectives with the acquisition of Danisco and Pannar Seeds while divesting performance coatings and having announced intentions to separate its performance chemicals business.

Separately, the company spend billions on repurchasing its shares while redesigning the business support. All of this should result in the company being able to meet its aggressive long term targets. These call for a 7% long term growth target in sales and a 12% compounded annual growth rate in earnings per share.

Valuing DuPont

Back in April, DuPont released its first quarter results. The company ended the quarter with $3.8 billion in cash, equivalents and short term investments. Total debt stood at $11.3 billion which results in a net debt position of about $7.5 billion.

The company has been posting trailing revenues of about $36 billion, with ongoing earnings are seen around $3.75 billion.

At $65 per share, DuPont's equity is valued at $60 billion. This values equity in the business at roughly 1.7 times annual sales and roughly 16 times earnings.

Appealing to investors is the quarterly dividend of $0.45 per share which provides investors with a 2.8% dividend yield.

Some Long Term Prospectus

DuPont has had a disappointing track record over the past decade, growing revenues at a compounded annual grate of just around 3% per annum. Earnings have been largely stagnant as well while the pace of share repurchases has not been impressive at all. The company paid solid dividends over this time period, but dividend growth has been relatively limited.

It should be no surprise that investors have seen relatively mediocre returns. Over the past decade shares have net gained about 50%, underperforming the wider S&P500. Investors who have reinvested all their dividends have seen fairly better returns.

Takeaway For Investors

While the earnings warning came as a surprise, it really should have not be a huge surprise. For years DuPont has been underperforming as the business has long way to go in divesting, streamlining and focusing its operations.

Trying to be active in so many markets is simply a very hard thing to do. While the impact of a soft corn season is felt by all players, Monsanto (NYSE:MON) revealed last week that it believed strong performance at its other units could offset the impact.

That being said, CEO Ellen Kullman is making the right moves, aiming to divest or spin-off the performance chemical unit, a unit typically reporting very volatile earnings. She also announced a $5 billion stock repurchase program, most likely under pressure from activist investor Nelson Peltz which holds a large stake in the business.

As such investors are already pricing in some of the anticipated cost savings of a billion to be achieved in 2019. This makes DuPont currently a mix of a value play, potential growth play, dividend paying stock and restructuring story.

Even when things go well earnings might come in at $4-$5 billion at a sustainable pace by 2019, valuing shares at roughly 13 times earnings at the midpoint of that guidance. Given the execution risks and time to reach these earnings, I am not very convinced.

Back at the end of last year, I checked out the company's prospects. I applauded the restructuring moves made by the company in what is a long term and slowly moving process, centered around its chemicals unit.

I concluded to say that shares were roughly fairly valued around that point in time as the high dividend provides a lot of support for the shares during this painful and slow moving progress. Last week's hiccup is not completely unexpected, as such DuPont remains a dividend play until more progress is made in the restructuring.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.