DuPont Co. (NYSE: DD), like most other companies this quarter, has had good earnings but falls short in other areas. The stock has been on a bearish run as of late and I do not see a catalyst in the near future to turn the stock around while it continues to lower its forecast for the year. I do see an opportunity to create a short term income trade while the stock is trending.
Earnings and Moving Forward
DuPont ended up with typical statistics like most companies this quarter. It reported adjusted earnings of $1.48 per share beating analyst's estimates of $1.46 per share. This has been common. And here is where most companies have fallen short and DuPont has marched by the same tune. It missed on revenues, earning a total of $11.01 billion compared to an estimate of $11.25 billion. The only positive area the business could report was in its agricultural division where it grew, accounting for 15% of its sales increase. Of the $11 billion in sales, $3 billion came from this segment.
Even though it reaffirmed its full-year earnings projections, DuPont expects to barely scrape the lower ends. With projections being ($4.20- $4.40) it hopes to hit the $4.20 level. Why the dismal forecast? With a higher tax rate for the company this year, it is leaning toward more conservative projections. Not only is it concerned about taxes, but like most other international companies, it will face some number readjustments because of the strengthening dollar. This forces companies like DuPont to cut earnings from overseas. It is cutting 12 cents to 14 cents from third-quarter earnings, an extra 10 cents from prior guidance over the full year, to a range of 30 cents to 35 cents. A stronger dollar does not always translate into more money for investors.
Analysts Lower Price Target
Jefferies & Co. reduced its recommendation on the stock to hold from buy and also lowered its price target from $62 down to $55. Why the downgrade (besides the deteriorating demand in Europe)? It would be inconsequential to talk about the falling demand in Europe since we all know the situation over there. What is important to mention is the weakening titanium dioxide market. Titanium Dioxide (TiO2) is used quite often for white pigment. The market had a good run for almost half a decade, but now the demand in shrinking and there is an over supply at the same time. Some price decreases of 5-10 cents/lb have begun to surface among coatings and paper makers and plastics compounders. Price hikes cannot seem to get a foot hold while so much product exits on the market. Some analysts believe prices are likely to drop again in the fourth quarter. This has a direct affect upon DuPont's profits.
DuPont is currently in a bearish peak and valley pattern after forming a double top reversal pattern from March through mid May. I am looking for weakness and signs of a possible reversal pattern in the future but I do not see any technical signs that will show me that. The RSI is creeping up on the lows, but the highs are not getting higher, which would indicate strength in upward moves. The MACD MA's also are barely keeping heads above the '0' marker. So from these observations, I am not convinced of any DuPont turnaround as of this point.
The Options Play
Seeing that DuPont has touched to top of the Bollinger Bands, I expect it to head back down now and will try to capture a profit with a bear put spread on the stock. For this reason I am looking at a bear put spread on the stock. It is currently trading at 50.37.
- Buy a January 2013 put with a strike of '50' (priced at $3.25)
- Sell a January 2013 put with a strike of '49' (priced at $2.74)
- Net Debit to Start: $0.51
- Maximum Profit: $0.49
- Maximum Risk: net debit
- Maximum Length of Trade: 6 months
Reasoning behind the Trade
- Following the bearish trend.
- Weakening of the Titanium Oxide market.
- Lowering forecast will not sit well with investors who like growing companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.