DuPont’s (NYSE:DD) two most important businesses are performance & safety materials and agriculture & nutrition based products, accounting for almost 40% and 29% of the $58.10 Trefis price estimate for DuPont. The performance and safety materials division supplies high-performance chemicals and materials that cater to a wide range of industries, examples being performance polymers such Nylon, and high-strength materials used for safety materials, such as DuPontTM Kevlar®, Nomex® and Tyvek®. The agriculture and nutrition based products division supplies genetically modified seeds/traits, agricultural chemicals (such insecticides and pesticides) and food ingredients to farmers/growers and the food industry. Dupont competes with other diversified industrial and chemical companies like Dow Chemicals (NYSE:DOW) , 3M Company (NYSE:MMM) and BASF. The company also competes with other global seed giants such as Monsanto (NYSE:MON) and Syngenta in its agriculture and nutrition-based products.
Here we highlight 2 of the most important drivers for DuPont’s business and the upside as well as downside risk posed for DuPont’s stock based on these drivers.
- Performance and Safety Materials Gross Margin: The performance and safety materials division has a current gross margin of 27%.
- Performance and Safety Materials Market Share: The division has a current market share of about 3.5% of the global specialty chemicals market.
20% Upside Scenario: $70 Trefis Price Estimate for DuPont
1. Increasing margins for performance & safety materials (+10%):
We currently forecast performance & safety materials gross margin to increase in future years. Margin growth can be higher than expected if raw material costs (many of which are dependent on petroleum prices) decline, as well as on account of higher capacity utilization (than what is currently expected) of the company’s production facilities.
There could be 10% upside to the Trefis price estimate if gross margins for the division were to reach 29% instead of the current 27% Trefis forecast.
2. Larger capture of market share (+10%):
Performance and safety materials market share depends upon two key factors: continued capacity expansions in emerging markets, as well as brand recognition of DuPont’s performance materials, such as Teflon, Zytel Nylon and Kevlar. We currently forecast market share for the division to reach around 4% by the end of the Trefis forecast period. However, we could see an upside to the stock price estimate if capacity expansion in Asia grows at a higher pace.
There could be 10% upside to the Trefis price estimate if market share was to reach close to 4.5%-4.6% by the end of the forecast period.
20% Downside Scenario: $47 Trefis Price Estimate for DuPont
1. Declining margins for performance & safety materials (-10%):
Although we currently estimate gross margins for the division to reach around 27% by the end of the Trefis forecast period, the margins are subject to pricing risks, especially since many raw materials are petroleum-based derivatives and hence depend on crude oil prices, which are highly volatile.
There could be a 10% downside to the Trefis price if gross margins reduce to about 25%, owing to high raw material costs.
2. Competition from local players can reduce market share (-10%):
Our current forecast estimates predict a rise in performance & safety materials market share to about 4% by the end of the Trefis forecast period. However, increased competition from other global chemical firms such as Dow Chemicals (NYSE:DOW) as well local/regional manufacturers (such as Chinese chemical companies) can prevent DuPont from capturing share in high-growth markets, especially in emerging economies such as China. Additional concerns include environmental regulations, which if strengthened can impact sales of certain products (such as PFOA based products).
There could be a 10% downside to the Trefis price if market share was to decline to about 3% by the end of the Trefis forecast period.
Disclosure: No positions