DuPont – Lower Guidance But Big Savings Ahead
DuPont lowered its guidance for 2014 by around 6% last night, citing slower than expected demand in the corn market – too much to offset gains in soy. Unlike FMC it appears that the DD problems were focused in the US rather than in Brazil. There was additionally some weakness in the herbicide market due to weather. Lastly the company has seen sales below expectation in the refrigerants sector of performance chemicals – mainly in the US. We would offer the following takeaways:
- It does not matter how robust your agriculture portfolio is, you cannot protect earnings and sales from movements in the two things that you do not control – weather and commodity prices. DuPont’s CEO expressed disappointment here, which perhaps suggest some of the issues were within the company’s control. At the end of the day you have to manage the things you can manage. Weather is not one of them – at least as far as we know.
o The agriculture business will always have a degree of unpredictability to it, but it should be nothing like the swings in the historic more commodity like segments where you have risk of losing both volume and price.
- The core businesses are reportedly doing very well and continue on the growth path that has been evident for the last 12-18 months. This is the future DuPont and it is doing OK.
Coincident with the earnings warning, DuPont chose to put more color around the cost initiative that the CEO outlined when speaking at a recent investor conference. At that time she indicated that more details would be coming later in the year, so the release of more detail yesterday may have been accelerated slightly, to perhaps soften the blow of the guidance. In recent research we suggested how this cost initiative might evolve and how large it might be. We got the overall magnitude right, but we underestimated how much might be achieved within 18-24 months.
- If DuPont can really pull as much as $650 million of costs out by the end of next year it will do have achieved several things: first it will spin out a performance chemicals business with a very competitive cost structure. Second it will eliminate all potential stranded costs and third it will lower the cost base of the residual DuPont meaningfully also
- Moreover, the new DuPont is not a commodity company – this is not about keeping up with declining cost curve and therefore giving all the savings to the customer. These cost reductions should fall to the bottom line.
- Even in the performance chemicals business DuPont should keep most of the savings as the company defines the low end of the cost curve and pricing will only come down if the companies at the top end of the curve cut costs.
Bottom line, the earnings guidance is unfortunate, but the core story is unchanged. Historically, buying DuPont on an earnings related dip has been the right move – we see this as no different.