Dupont Meets Expectations but Chemicals Business Struggles

On Tuesday, DuPont reported third-quarter results that generally matched our expectations. DuPont experienced year-over-year operating earnings improvement in all of its segments except performance chemicals. We’re raising our fair value estimate to $57 per share from $55 to account for slight modifications to our forecast and the effect of the time value of money since our last update. We are maintaining our narrow moat rating for the company.

The firm’s agriculture business, a main contributor to DuPont’s narrow moat, has posted year-to-date sales growth of 12% and operating earnings growth of 8%. Earnings growth has been held back this year by higher seed input costs, but we expect that this pressure will abate in 2014 with lower corn and soybean prices.

While the company runs second to wide-moat Monsanto in the biotech seed business, DuPont has built a solid position in the market, controlling a strong germplasm, or seed bank, and capable distribution and marketing operation. With a delay in the USDA October crop report due to the government shutdown, DuPont noted that it was too early to be definitive on market share gains or losses versus major competitors, such as Monsanto.

The performance chemicals business continues to drag on DuPont’s results, as titanium dioxide (TiO2) price declines have dented both sales and margins this year. While TiO2 volumes were up 25% year over year, prices dropped considerably compared with the prior-year period. Management reiterated that it is exploring strategic options for performance chemicals. We believe the TiO2 business contributes to DuPont’s moat, as the company’s unique production process positions DuPont at the low end of the industry cost curve. Even after the likely divestment of performance chemicals, the company’s other moatworthy endeavors will still make up enough of company profits to justify a narrow moat rating.

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