On Jan 30, we reaffirmed our Neutral recommendation on chemical giant DuPont ( DD). While we remain encouraged by strong momentum in the company’s agriculture business, we prefer to tread with caution factoring in persistent weakness in its performance chemicals business, currency headwind and a still challenging operating backdrop in Europe.
DuPont, on Jan 28, posted mixed fourth-quarter 2013 results with adjusted earnings topping the Zacks Consensus Estimate while sales missing the same. Reported profit nearly doubled year over year on strength in the company’s fast-growing agriculture business. However, its performance chemicals business remained a weak spot.
DuPont, a Zacks Rank #3 (Hold) stock, is seeing strength in its agriculture business, reflected by higher corn seeds and crop protection sales. Despite unfavorable currency impact, the Agriculture segment saw double-digit rise in sales in the fourth quarter boosted by healthy insecticide sales in Latin America and earlier seed shipments, aided by the company’s acquisition of a majority stake in Pannar Seed (Pty) Limited.
DuPont is seeing healthy demand for its corn hybrids and expects continued strong growth in crop protection driven by new products. The company has numerous new products in its pipeline that are expected to create value for its customers.
Moreover, DuPont is focused on an aggressive cost-cutting strategy by reducing fixed costs, restructuring work schedules and improving working capital productivity. The company successfully reached its cost savings target of $300 million for 2013 from its restructuring actions.
DuPont also has a healthy balance sheet and remains committed to boost shareholder returns. It recently announced a $5 billion share repurchase program, of which, shares worth $2 billion are expected to be bought back in 2014.
However, DuPont’s performance chemicals business was a weak link in the fourth quarter. Demand of titanium dioxide (TiO2), which is used to give paint and other coatings a white hue, remains weak, partly due to challenging economic conditions in Europe.
DuPont’s Board, in Oct 2013, approved the spin off of the struggling performance chemicals unit (expected to close by first-half 2015). Lower TiO2 pricing hurt profitability in the performance chemical business in the fourth quarter and is expected to remain a headwind in the near term.
DuPont is also exposed to significant currency headwinds and high energy and raw material costs. Given a strengthening U.S. dollar versus most currencies, DuPont saw negative currency impact of 15 cents per share on its earnings in 2013. Currency headwind is expected to sustain in 2014 due to a stronger dollar.
Other Stocks to Consider
Other companies in the chemical industry worth considering include L'Air Liquide SA ( AIQUY), Northern Technologies International Corp. ( NTIC) and PPG Industries Inc. ( PPG). While both L'Air Liquide and Northern Technologies carry a Zacks Rank #1 (Strong Buy), PPG Industries holds a Zacks Rank #2 (Buy).