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Will DuPont (DD) Witness Turbulence in the Next Year Too?

Namrata Chatterjee

DuPont de Nemours, Inc. DD had a dismal run this year, as the company was plagued with soft demand across some of its businesses due to the U.S-Sino trade tiff, sluggish automotive and electronics end markets, and weakening global economic conditions. These factors have caused its shares to nosedive 60.3%, over the past year, worse than the industry’s decline of 16.7% and the S&P 500’s gain of 29.2%.



Wilmington, DE-based DuPont, formerly known as DowDuPont Inc., started trading as a stand-alone company on Jun 3, 2019, following the separation of its Agriculture division through the spin-off of Corteva, Inc. Following the Corteva separation, DuPont now holds the specialty products business of the former DowDuPont. The company’s shares have slumped since the Corteva spin-off.

Factors Plaguing DuPont

Soft demand in the semiconductor market has been affecting volumes in the company’s electronics and imaging business unit. Moreover, softness across the automotive and electronics end markets are hurting sales volume in the Asia-Pacific and EMEA regions.

Weakening global economic conditions and trade tariffs are hurting automotive and electronics demand. Consequently, demand weakness, especially in automotive and semiconductor, is dampening the company’s organic sales.

Soft demand is expected to thwart the company’s 2019 organic sales performance.  Its organic sales this year have been modestly down from the prior year.

DuPont has also been plagued with headwinds due to higher manufacturing costs, which will likely strain the company’s margins. It witnessed elevated manufacturing costs across some of its segments in the third-quarter 2019. In particular, higher plant turnaround expenses spiked manufacturing costs in the company’s safety & construction unit. DuPont expects margins in its nutrition & biosciences and safety & construction units to be hurt by higher manufacturing costs in 2019.

These apart, DuPont is exposed to currency headwinds, which mar its organic sales. The company expects unfavorable currency-translation impact on sales and margins across its segments. The company has also narrowed its adjusted earnings guidance for 2019, factoring in unfavorable currency-translation impact of roughly $45 million in the second half of the year.

Remedial Measures Taken

DuPont is actively managing its portfolio with an aim for value creation. The company is divesting non-core assets to focus more on high-growth, high-margin businesses. It is making significant progress in its divestiture actions.
 
In sync with this, recently, DuPont agreed to combine its Nutrition & Biosciences (N&B) business unit with International Flavors & Fragrances IFF to form a new entity with 55.4% shareholding. This transaction is likely to close by the end of first-quarter 2021. DuPont’s N&B business is well poised to deliver solid results, with impressive growth in the Probiotics & Enzymes business in the days ahead.

Upon the deal’s closure, DuPont will get one-time cash payment of $7.3 billion, enabling the company to boost shareholders’ returns, repay debts and focus on growth through potential merger and acquisitions.

Notably, in September, DuPont agreed to sell its silicon wafer business to SK Siltron. The divestment backs DuPont's strategy to boost portfolio management and capital allocation.

DuPont remains focused on driving growth though innovation and new product development. Product launches are driving growth in automotive electrification, health care, water and sustainable food platforms. The company’s innovation-driven investment is focused on several high-growth areas. It remains committed to drive returns from its R&D investment. Furthermore, DuPont is well poised to benefit from improved returns on invested capital and expanded profit margin over the long haul.
 
The company is also focused on bolt-on acquisitions to strengthen high-growth industry-leading businesses. DuPont recently agreed to purchase closed circuit reverse osmosis company, Desalitech Ltd, for an undisclosed price. The acquisition will reinforce its strategy of offering a strong portfolio of technologies to address customers' current and future challenges. In October, the company acquired Memcor business, including the ultrafiltration and membrane biofiltration technologies. The acquisition will open up the company’s Water Solutions business to additional market spaces. Also, the company’s Safety & Construction arm has agreed to purchase the ultrafiltration membrane business from the German chemical giant, BASF SE. This buyout will expand the company’s water-purification capabilities. These strategic acquisitions are expected to allow DuPont to boost growth in the days ahead.

Moreover, DuPont is benefiting from cost-synergy savings and productivity improvement. The company achieved roughly $145 million in savings from cost synergies and additional cost actions in third-quarter 2019. DuPont aims to deliver more than $500 million in savings for the current year. The company’s cost and productivity initiatives, and synergy benefits will likely drive margin expansion in 2020 as well. The company also remains focused on boosting its cash flow and shareholder value.

Will 2020 Bring Better Tidings?

Despite bleak demand across end markets and soft global economic conditions, the company’s investment in innovation, product development as well as cost and productivity initiatives are likely to position it well for growth next year.

The current-year scenario does not appear encouraging for the company, which currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2019 earnings is currently pegged at $3.80, suggesting a year-over-year decline of 69.2%. The same for 2020 is pegged at $4.25, indicating year-over-year growth of 11.9%.
 
Key Picks

Some better-ranked stocks in the Chemical – Diversified industry are Air Products and Chemicals, Inc. APD and Akzo Nobel N.V. AKZOY, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Air Products has an expected earnings growth rate of 15.4% for the fiscal year 2020. The company’s shares have appreciated 47.1% in the past year.

Akzo Nobel has a projected earnings growth rate of 26.3% for 2020. The stock has gained 13.7% in a year’s time.

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Air Products and Chemicals, Inc. (APD) : Free Stock Analysis Report
 
DuPont de Nemours, Inc. (DD) : Free Stock Analysis Report
 
Akzo Nobel NV (AKZOY) : Free Stock Analysis Report
 
International Flavors & Fragrances Inc. (IFF) : Free Stock Analysis Report
 
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