We have reaffirmed our Neutral recommendation on chemical giant DuPont
(DD - Analyst Report
). While strong momentum in its agriculture business remains encouraging, we prefer to be on the sidelines considering the weakness in the performance chemicals franchise.
DuPont’s second-quarter 2013 results (reported on Jul 23) was a mixed bag with adjusted earnings beating the Zacks Consensus Estimate while sales missing the same. Profit fell by double digits on lower titanium dioxide (TiO2) pricing. Strength in the agriculture business was offset by weakness across performance chemicals and electronics franchises. DuPont announced that it may sell the performance chemicals business.
DuPont, a Zacks Rank #3 (Hold) stock, is witnessing strength in its agriculture business, reflected by higher corn seeds and crop protection sales. Despite higher input costs, the Agriculture segment delivered healthy sales in the second quarter boosted by higher volume and strong performance of the crop protection business.
A strong start in the North American growing season is boosting the agriculture business. DuPont is seeing healthy demand for its corn hybrids and expects continued strong growth in crop protection this year driven by new products.
Moreover, DuPont is focused on an aggressive cost-cutting strategy by reducing fixed costs, restructuring work schedules and improving working capital productivity. The company also has a healthy balance sheet and remains committed to boost shareholder returns.
That said, we also account for the weakness across TiO2 and photovoltaic markets. The demand of TiO2, which is used to give paint and other coatings a white hue, remains weak, partly due to the challenging economic conditions in Europe. Lower TiO2 pricing is hurting the results in the performance chemical business.
DuPont is also exposed to currency headwinds and is seeing a decline in sales volumes across many segments. Given a strengthening dollar versus most currencies, DuPont now expects negative currency impact of 12 cents to 14 cents per share on its earnings for 2013, much higher than its prior-expectation of 5 cents per share.
Other Stocks to Consider
Other companies in the chemical industry with favorable Zacks Rank are Northern Technologies International Corp.
, Cytec Industries Inc.
and PPG Industries Inc.
(PPG - Analyst Report
). All of them carry a Zacks Rank #2 (Buy).