The Strategist

DuPont exceeded Wall Street's expectations

07/26/2016 - 15:28

Profit of chemical giant DuPont Co, Dow Chemical Co.’s rival, grew by 8.4% on the results of the 2nd quarter of 2016. The company is linking this to great success in the agriculture sector, and to cutting expenses in the food sector.
DuPont’s largest segment, the agriculture, has been increased by 3% driven by higher sales of corn seeds and insecticides. Operating profit rose 30% to $ 130 million in the food sector, primarily due to sales of probiotics and special proteins that help companies reduce costs.

In addition, DuPont declared a decrease in operating expenses by 12%.

Last week, DuPont and Dow Chemical reported on the forthcoming merger, which has already been approved by their shareholders. The combined company will be called DowDuPont; the merger itself is supposed to reduce costs.

After completion of the merger, the company will exist during 18 to 24 months, and then closed. After that, the company will be divided again and will be put up for public auction. Each of the companies will focus its attention on agriculture, material science and specialty products in the food and electronics sectors.

Executive Director of DuPont Edward Breen said that the merger is expected to be closed in a year.

Both companies are now under pressure of investors. Hedge fund Third Point, in the case of Dow Chemical, and Trian Fund Management, in the case of DuPont, previously demanded to cut costs, get rid of non-core assets to become more efficient.

Breen said that combination of businesses and their subsequent division into three parts is much more preferable than just division of DuPont itself, as Trian offered in late 2014. The proposed transaction is "a completely different scenario, we are creating three strategic platforms, which will play a leading role [in their market segments], instead of separating DuPont into three small pieces."
The merger, which will be the largest in the chemical sector and one of the largest in the world, will significantly change balance of power on the chemical, and, particularly, agricultural markets. DowDuPont would edge out Syngenta, the global leader in the market of pesticides, and Monsanto, which now prevails on the seed market.

In the second quarter of 2016, DuPont earned $ 1.02 billion, which is $ 1.16 per share, compared with $ 940 million or $ 1.03 per share in 2015.

Analysts polled by Thomson Reuters expected an operating profit of $ 1.10 per share. Except for some items, the company earned $ 1.24 per share. According to DuPont’s estimates, currency fluctuations reduced quarterly value of the shares by 0.1 US dollar.

DuPont’s quarterly sales fell 0.8% to $ 7.06 billion. The company said that increase in sales to 2%, instead of the expected 3%, was offset by increased local prices and currency fluctuations.

Analysts are forecasting revenue of $ 7.01 billion. In addition, DuPont has adjusted its forecast for share value in 2016 from $ 3.15 to $ 3.20, compared to the previous range of $ 3.05 to $ 3.20.

Tellingly, the stocks that rose in price by 20% at premarket trading, have not changed its value during the last three months.