Shares of DuPont de Nemours (NYSE:DD) have gained around 24% over the past three months, on the back of an accelerated pace of share buybacks and resilient demand for its specialty chemical products. Can the company’s upcoming quarterly earnings support further recovery for investors?
DuPont is set to release its fourth quarter financial results on February 7, 2023, before the market opens.
The company has a strong track record of outperforming market expectations; DuPont has exceeded the consensus analysts’ forecasts for both adjusted earnings and revenue for the past 11 consecutive quarters. Most recently, for Q3 2022, DuPont beat the consensus adjusted EPS forecast of $0.79 by 3 cents, with $0.82. Moreover, revenue was 4% higher than the consensus estimate, at $3.32 billion.
Current expectations for the upcoming quarterly earnings release do not set a particularly high bar, although there is still some uncertainty about the impact of COVID-related disruption in China on DuPont’s Q4 2022. In addition, softness in smartphones and personal computing sales, as well as slowing semiconductor fab production rates, are other risks that could derail its Q4 financial results.
Analysts expect DuPont’s upcoming Q4 revenue to come in at $3.09 billion, representing a 28% decline from the same quarter in the previous year. However, last year’s Q4 revenue included a contribution from its Mobility & Materials unit, which had since been sold to Celanese (NYSE:CE) for $11 billion. Once discontinued operations have been excluded, the adjusted Q4 2021 revenue would have been $3.25 billion. As such, the market forecasts point to a more modest revenue decline of 5% on a comparable basis.
Meanwhile, analysts expect DuPont to deliver $0.78 in adjusted earnings per share, down from $1.08 a year ago. On a comparable basis, however, this would be slightly higher than the adjusted EPS figure of $0.77 from Q4 2021, when only continuing operations are included.
The divergence between revenue and earnings growth largely reflects the impact of the stronger dollar in 2022. This is because even as currency headwinds bite into its top-line, the positive momentum in earnings growth is underpinned by productivity improvements and margin development.
Whether earnings and revenue beat or miss market expectations may not be the main factors that will affect the company’s near-term share price performance, as investors will likely pay more interest to forward-looking indicators. DuPont is expected to announce its 2023 full year guidance at the time of its Q4 earnings release, and investors will be keen to see confirmation that demand continues to hold up well.
The reopening of the Chinese economy, following roughly three years of periodic strict lockdowns, would likely benefit the demand side going forwards. COVID-related disruptions aren’t over yet, but the end is clearly in sight. China’s most recent Purchasing Managers Index (PMI) positively surprised the market a few days ago, and that indicated a faster than expected pace of rebound in China’s economic climate, following the lifting of nearly all COVID restrictions there. DuPont is especially well positioned to benefit from this, as it generates 24% of the group sales from China - giving it considerably more exposure to the world’s second largest economy compared to many of its peers.
Elsewhere, an easing of cost inflation pressures, particularly from raw materials and energy is expected to benefit margins. Currency headwinds have also weakened in recent months, with the US dollar index down 12% from its peak in late September. Although the outlook for the dollar remains uncertain, peak dollar may have already passed, as optimism towards a Fed pivot is growing. With this in mind, analysts will be looking out for top-line strength, as well as higher profitability, in the company’s 2023 outlook.
Following the divestment of its Mobility & Materials unit last year, DuPont has been carrying excess capital on its balance sheet. The company had intended to use much of the proceeds to fund the acquisition of Rogers Corporation (NYSE:ROG), but this deal was terminated in November 2022, after the merger failed to win Chinese antitrust approval before the November 1 deadline.
Plans to deleverage, amid the rising rate environment, and a new $5 billion share repurchase program, which had been announced in its Q3 2022 earnings release, will utilize the majority of the proceeds from the M&M sale. However, I expect there remains another $2-3 billion in extra headroom that could be used for future shareholder distributions, if alternative M&A opportunities could not be found.
Management will probably adopt a wait-and-see approach towards future M&A opportunities; DuPont is keen to enhance its exposure towards fast-growing markets in semiconductors and electric vehicles, but market valuations and takeover premiums mean there are currently few attractive options. The present environment makes it impracticable for transformative deals, although smaller bolt-on acquisitions may still be feasible.
"We expect to finish the year with a leverage ratio significantly below our longer-term target, maintaining balance sheet capacity to further allocate excess capital through a combination of bolt-on M&A and potential share repurchases over time. Our M&A focus remains on targets that fit within our growth pillars and are aligned with key secular growth trends."
Chief Executive Officer Ed Breen, DuPont Q3 2022 Earnings Call
An increase to quarterly dividends may be more forthcoming in the short term. The board has committed itself to grow its dividend annually in line with earnings, with a payout ratio in the range of 35-45%. A hike in the dividend would not be too much of a financial burden on DuPont as stock buybacks reduce its share count and boost EPS. Another factor in its favor is a likely reduction in inventory levels, due to the improving global supply chain outlook, which should free up some of its working capital.
DuPont has paid a quarterly dividend of $0.33 per share for the past four quarters, and so shareholders are due for a dividend increase for the upcoming payment. The stock has a trailing dividend yield of 1.78%, on a payout ratio of 36.7%.
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