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DuPont (DD) Q2: Will Its Earnings Surprise Amid Challenges?

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DuPont (DD - Free Report) is set to release its second-quarter 2016 results ahead of the bell on Jul 26.

The Delaware-based company saw higher profits in first-quarter 2016, helped by its cost management actions. Adjusted earnings for the quarter topped the Zacks Consensus Estimate. Revenues declined year over year on unfavorable currency impact, but beat expectations.

Let’s see how things are shaping up for this announcement.
 
Factors to Watch For

DuPont, in its last earnings call, bumped up its earnings guidance for 2016. The company now expects operating earnings of $3.05 to $3.20 per share for 2016, up from its earlier view of $2.95 to $3.10 per share. It includes expected benefit of 64 cents per share from the company’s 2016 global cost savings and restructuring plan.

The guidance takes into account increased corn planted area than earlier expected and the unfavorable impact from Pioneer's switch to an agency-based route-to-market approach in the southern U.S., which will move some sales from 2016 to first-quarter 2017. DuPont also expects operating earnings for first-half 2016 to be roughly flat year over year.

DuPont’s cost-saving and productivity measures should lend support to its earnings in the second quarter. The company is taking aggressive cost-cutting actions amid a still challenging operating backdrop. The company’s 2016 cost savings and restructuring program, which builds on its operational redesign initiative, is expected to deliver cost reductions of $730 million in 2016.

However, DuPont is faced with several headwinds that could affect its June quarter results. DuPont remains exposed to weak agricultural market conditions. It is seeing soft insecticide demand in Latin America. Lower insect pressure in Brazil and abundant inventories in the Americas present headwinds in crop protection markets.

Moreover, as the company derives more than 60% of its sales from overseas markets, currency headwinds (given a strong U.S. dollar) may continue to weigh on its top line in the second quarter. DuPont sees unfavorable currency impact of 20 cents per share on its 2016 operating earnings. The expected impact is, however, lower than the company’s prior view of 30 cents per share.

DuPont is moving forward with its planned mega-merger with Dow Chemical (DOW - Free Report) . DuPont and Dow agreed to combine their businesses in Dec 2015 in an all-stock deal to create a chemical powerhouse (dubbed “DowDuPont”) with a combined market value of around $130 billion, before eventually breaking up into three independent companies through tax-free spin-offs.

The combined company would split into pure-play agricultural, material science and specialty products businesses that will be leading players in their respective fields. The breakup is expected to take place 18-24 months after the completion of the deal, which is expected in second-half 2016. The deal recently secured approvals from shareholders of both companies and is now subject to customary closing conditions including receipt of regulatory clearances.

The proposed mega-merger is projected to deliver cost synergies of around $3 billion, expected to be achieved with the first two years after the deal closure. Around $1 billion of additional growth synergies are also expected to be achieved from the merger.

Both companies expect the ‘merger of equals’ to enhance their growth profiles through expanded scale and complementary offerings (especially in agriculture) and drive shareholder value. We expect DuPont to provide an update on the planned merger in its second-quarter call.
 

DU PONT (EI) DE Price and EPS Surprise

DU PONT (EI) DE Price and EPS Surprise | DU PONT (EI) DE Quote

Earnings Whispers

Our proven model does not conclusively show that DuPont is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for DuPont is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at $1.10.

Zacks Rank: DuPont’s Zacks Rank #3, when combined with a 0.00% ESP, makes surprise prediction difficult. We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look
 
Here are some stocks in the basic materials space that you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Huntsman Corporation (HUN - Free Report) has an Earnings ESP of +7.84% and a Zacks Rank #1.

FMC Corp. (FMC - Free Report) has an Earnings ESP of +4.48% and a Zacks Rank #2.

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