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DuPont (DD) Q1 Earnings: Can the Stock Spring a Surprise?

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DuPont is gearing up to release its first-quarter 2017 results ahead of the bell on Apr 25.

The Delaware-based company continued its positive earnings surprise streak with a solid beat in fourth-quarter 2016, helped by its aggressive cost-reduction actions. Its adjusted earnings of 51 cents per share for the quarter outstripped the Zacks Consensus Estimate of 42 cents. Revenues fell in the quarter on lower volumes and missed expectations.

DuPont has beaten the Zacks Consensus Estimate in all of the last four quarters with an average beat of 29.90%. Is the company poised for another winning quarter? Let's see how things are shaping up for this announcement.

Factors to Watch For

DuPont, in its fourth-quarter call, said that it expects earnings (on a reported basis) for first-quarter 2017 to decline roughly 18% year over year. The guidance includes an expected charge of about 15 cents per share for transaction costs related to the planned merger with Dow Chemical .

The company expects adjusted earnings for the first quarter to increase around 8% year over year factoring in the benefits of cost saving actions and the impact of the change in timing for seed deliveries, mostly related to the southern U.S. route-to-market change in Agriculture, partly masked by an expected reduction in planted corn acres in the U.S. DuPont also expects flat sales for the first quarter on a year over year basis.

DuPont has outperformed the Zacks categorized Chemicals-Diversified industry over a year, helped by its forecast-topping earnings performance and aggressive cost-cutting initiatives. The company’s shares have gained 18.7% over this period, compared with the industry’s gain of around 11.6% over the same period.


DuPont's cost-saving and productivity measures should continue to lend support to its earnings in the March quarter. The company is taking aggressive cost-cutting actions amid a still challenging operating backdrop.

The company's 2016 restructuring program delivered net cost reductions of $750 million in 2016, surpassing the target of $730 million. DuPont said that productivity will remain one of its top priorities in 2017.

The company is also seeing favorable market response for its new Leptra corn hybrids in Brazil and its latest crop protection product, Zorvec fungicide. The company introduced around 1,600 new products in 2016. It remains committed to introduce new higher-performing products to meet farmers’ needs.

However, DuPont is exposed to certain challenges that could affect its first quarter results. DuPont’s agriculture business is still faced with industry-wide challenges. Weak farm commodity prices, abundant seed and crop protection inventories and tight credit conditions are affecting this major market.

Abundant inventories in the Americas pose headwind for the crop protection markets in 2017. Moreover, growers’ preference of soybeans over corn in North America is expected to have an unfavorable impact on earnings in the company’s agriculture business. Expected reduction in corn acres may also weigh on its agriculture sales in 2017.

Additionally, the company is exposed to currency headwinds. The company expects currency headwinds in first-quarter 2017 due to a stronger greenback versus the euro and most currencies in emerging economies

Moreover, sustained sluggishness in consumer electronics market is still affecting the company's Electronics & Communications division. Moreover, lower anticipated demand in the photovoltaics market in China due to reduced government subsidies and capacity constraints is expected to affect the segment in first-quarter 2017.

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 breakup is expected to take place 18 months after the completion of the deal.

DuPont and Dow, in Mar 2017, said that the European Commission (EC) has conditionally approved their proposed merger. The approval, which came after both companies committed to sell major portions of different businesses, is a major step toward closing the merger transaction. The approval is conditional on the companies fulfilling the commitments given to the EC in connection with the clearance.

DuPont, last month, struck a deal to sell part of its Crop Protection business to chemical company, FMC Corp. Moreover, DuPont agreed to buy substantially all of FMC's Health & Nutrition business. DuPont will get $1.6 billion from the transaction, reflecting the difference in the value of the assets.

Under the deal terms, FMC will buy DuPont's Cereal Broadleaf Herbicides and Chewing Insecticides portfolios as well as some of the latter’s Crop Protection research and development pipeline and organization. The divestment will satisfy DuPont's commitments to the EC in connection with the latter’s conditional regulatory approval of the proposed merger of DuPont and Dow.
 
The deal with FMC is expected to complete in the fourth quarter of 2017. The transaction is subject to the completion of the DuPont-Dow merger and other customary closing conditions.

DuPont and Dow also amended their merger deal to accommodate the requirements of the FMC transaction. The companies now expect completion of their merger to take place between Aug 1, 2017 and Sept 1, 2017. The closing is subject to satisfaction of customary closing conditions including receipt of regulatory approvals. Earlier, the transaction was expected to complete in first-half 2017. We expect DuPont to provide an update on the planned merger in its first-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 $1.38. 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 #2, 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:

The Chemours Company (CC - Free Report) has an Earnings ESP of +4.08% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Albemarle Corporation (ALB - Free Report) has an Earnings ESP of +2.11% and carries a Zacks Rank #2.

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