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DuPont (DD) Q4 Preview: Another Earnings Beat in Store?

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DuPont (DD - Free Report) is gearing up to release its fourth-quarter 2016 results ahead of the bell on Jan 24.

The Delaware-based company’s adjusted earnings for third-quarter 2016 outstripped the Zacks Consensus Estimate, aided by its aggressive cost-reduction actions. The company saw improved operating margins across its business segments in the quarter. Revenues rose modestly in the quarter as increase in volumes on higher demand across performance materials, agriculture and nutrition & health businesses offset a decline in prices.

DuPont has beaten the Zacks Consensus Estimate in all of the last four quarters with an average beat of 25.50%. Is the company poised for another winning quarter? Let's see how things are shaping up for this announcement.

DuPont Co. Price and EPS Surprise

 

DuPont Co. Price and EPS Surprise | DuPont Co. Quote

Factors to Watch For

DuPont, in Oct 2016, raised its adjusted earnings guidance for 2016. The company now sees adjusted earnings for 2016 to rise 17% year over year to $3.25 per share, an increase from its earlier view of $3.15-$3.20 per share. The company now expects full-year earnings (on a reported basis) to be roughly $2.71 per share.

DuPont has outperformed the Zacks categorized Chemicals-Diversified industry over a year, helped by its forecast-topping earnings performance and aggressive cost-cutting and productivity initiatives. The company’s shares have gained 36.2% over this period, compared with the industry’s gain of around 34.3% over the same period.


 

DuPont's cost-saving and productivity measures should continue to lend support to its earnings in the fourth 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 net cost reductions of $730 million for full-year 2016. The company expects to achieve around 64 cents per share in cost reductions in 2016 through its global cost savings and restructuring program.

The company is also seeing favorable market response for its new Leptra corn hybrids in Brazil and its latest crop protection product, Zorvec fungicide. It remains committed to introduce new higher-performing products to meet farmers’ needs.

However, DuPont is exposed to certain challenges that could affect its December quarter results. DuPont’s agriculture business is still faced with industry-wide challenges. Abundant inventories in the Americas pose headwind for the crop protection markets.

DuPont expects agriculture sales to decline in the mid-single digits clip in fourth-quarter 2016. Sales are expected to be unfavorably affected by sustained weakness in agricultural commodity prices and the company’s move to shift seed deliveries from the fourth quarter to first-quarter 2017.

Additionally, the company is exposed to currency headwinds. DuPont expects its sales for full-year 2016 to decline by low single-digit clip year over year factoring in the currency impact. Unfavorable currency swings are also expected to affect the company’s earnings per share for the full year by 15 cents.

Moreover, sustained weakness in consumer electronics market is hurting sales in the company's Electronics & Communications division. Lower demand for Tedlar film due to a weakness in the photovoltaics market in China is affecting the segment. The company expects photovoltaics market to decline year over year in China in the final quarter of 2016.

DuPont and Dow Chemical (DOW - Free Report) 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 breakup is expected to take place 18 months after the completion of the deal.

The deal secured approvals from shareholders of both companies in July and is now subject to customary closing conditions including receipt of regulatory clearances. The deal is currently under investigation by the European Commission (EC) with a decision is expected by Feb 2017.

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. We expect DuPont to provide an update on the planned merger in its fourth-quarter call.

Earnings Whispers

Our proven model does not conclusively show that DuPont is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This 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 are pegged at 42 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: DuPont currently carries a Zacks Rank #3, which when combined with a 0.00% ESP, makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

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:

Methanex Corporation (MEOH - Free Report) has an Earnings ESP of +53.33% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Albemarle Corporation (ALB - Free Report) has Earnings ESP of +2.67% and carries a Zacks Rank #2.

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