DuPont - Spinning Off The Dead Weight

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 |  About: E. I. du Pont de Nemours and Company (DuPont) (DD)
by: Alpha Strategist

Summary

DuPont reported its second quarter results. It declared EPS of $1.17 reflecting a decrease of 9 percent compared to the figure reported in the second quarter of 2013.

The company also re-affirmed its full year EPS outlook that is expected to be in the range of $4.00-$4.10 per share.

The agriculture segment constitutes a major share of total revenues at 37 percent and is also expected to improve its performance.

The performance chemicals separation is on track and is expected to be completed by the middle of 2015.

E.I.du Pont de Nemours & Company (NYSE:DD) recently reported its second quarter earnings. The company's adjusted diluted earnings per share of $1.17 for the quarter fell by around 8.6% compared to the second quarter of 2013. The lower than expected results were primarily due to lower agricultural sales volume and ongoing pricing pressures in the chemicals segment. Moreover, the company also lowered its full year guidance. It now expects its 2014 full-year adjusted diluted EPS to remain in the range of $4 to $4.1.The lower earnings were not a surprise for investors as the company cautioned in advance that its second quarter performance would not be very positive. So in this article, I will explicitly discuss the company's recent results while putting special emphasis on the future outlook of its key operating segments such as its agriculture business.

Agriculture Segment

DuPont operates as a science and technology-based company. The company is widely recognized as a chemical producer but with over time, the company has significantly shifted its portfolio to agriculture, nutrition, and biosciences. With the agriculture segment, the company provides important seed products, herbicides, fungicides and insecticides. Currently, the segment contributes approximately 37 percent to the total revenues making it the largest contributing segment. Since the segment carries such a higher weight in relation to overall revenues, a trivial decline in the performance offset the overall performance of the company.

During the quarter agriculture earnings were affected by lower corn seed volumes as a result of a reduction in corn-planted areas. On the other hand, crop protection sales grew by 4 percent due to strong growth in Latin America but were partially offset by lower volumes posted by herbicides sales in North America and Europe. Going forward, the agriculture segment is expected to improve. The company has been enacting efforts to use its technology to make innovative products.

New launches of Cyazypyr and Lumigen seed treatments will help the company to score improve its profits. In addition, Rynaxypyr is expected to continue capitalizing on the growth opportunities in the insect control industry. Conversely, the company expects weak demand for corn during the Latin American planting season as well. Despite the lower sales volume of the agriculture business segment, the nutrition & health segment posted strong quarterly results. The segment increased sales by 7 percent due to broad-based volume growth supported by an improved product mix.

Performance Chemicals

The company's performance chemicals segment primarily deals in titanium dioxide (TiO2) and fluoro chemicals. The segment makes up approximately 15 percent of the total revenues. The segment was severely hit by the lower prices of finished products. During the quarter, the operating income from the segment declined by 6 percent as compared to same quarter of previous year. The decline is primarily due to the lower prices of chemicals which declined by 4% compared to last year's figure. The company continues to suffer from the cyclical volatility in prices.

Therefore, the company decided to spin-off the performance chemicals division into a separate company in last October. Moreover, during the second quarter earnings call, the company's officials announced that the spin-off process is on-track and is expected to be completed by the middle of next year. The spin-off can ensure bright long-term prospects. The decision is generally considered to be revenue-assertive as it will reduce the impact of cyclical volatility in chemical prices on the company's portfolio.

Conclusion

From 2008 to 2013 the company was able to grow the sales of its agriculture segment by an average of 12% per year which is well above the long-term growth target. The growth rate is also higher than its competition. In 2015 and 2016, the USDA estimates that the corn yield will hit a new record even as we near the end of the key pollination period for corn. DuPont's VP of Agriculture and Nutrition said, "If the current supply dynamics continue and corn planted area remains under pressure it will temper short-term growth rates for the agricultural segment particularly in our seed business".

Moreover, the spin-off of the performance chemicals segment is expected to be completed by the middle of next year. The successful completion of the spin-off will protect the company from the impact of cyclical volatility in chemical prices.

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.