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DuPont (DD) Warms Up to Q2: Another Earnings Beat Coming?

DuPont DD is gearing up to release its second-quarter 2017 results ahead of the bell on Jul 25.

The Delaware-based company kept its positive earnings surprise streak alive with a solid beat in first-quarter 2017, supported by higher sales, strong demand for new products and benefits of its cost-reduction actions.

Its adjusted earnings of $1.64 per share for the quarter, topped the Zacks Consensus Estimate of $1.38. Revenues rose 5% year over year to $7,743 million on higher volumes and pricing, surpassing the Zacks Consensus Estimate of $7,539 million. The company saw higher sales in most segments in the quarter, supported by improved demand in major markets and new product launches.

DuPont’s shares have rallied 24% over the past year, outperforming the 22.2% gain of the industry it belongs to.

DuPont has beaten the Zacks Consensus Estimate in all of the last four quarters with an average beat of 28.73%. 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 first-quarter call, said that it expects earnings per share (on a reported basis) for first-half 2017 of around $2.42, a decline of roughly 5% from the prior year. The guidance includes an expected charge of about 32 cents per share mainly related to the planned mega-merger with Dow Chemical DOW.

Adjusted earnings for the first half are expected to be roughly $2.90 per share, reflecting a roughly 16% year over year increase, mainly driven by higher sales. The expected increase in sales is due to the impact of the change in timing for seed deliveries, mostly related to the southern U.S. route-to-market change in Agriculture and strength in automotive markets.

DuPont's cost-saving and productivity measures should continue to lend support to its earnings in the June quarter. These initiatives are delivering cost savings through reduction of operating costs and productivity improvements across the board.

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 traction 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. New products and continued healthy demand in key markets including automotive and electronics should support its second-quarter results.

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

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.

Moreover, sales in the company’s nutrition & health business are expected to be affected by the impact of portfolio changes. This segment is expected to face challenging market conditions this year, especially in the Middle East and Latin America. DuPont also sees elevated product costs in its performance materials business for first-half 2017 due to raw material cost inflation in major feedstocks.

DuPont is moving forward with its proposed merger with Dow Chemical, which is expected to create significant synergies. The companies, last month, secured clearance from Canada's Competition Bureau for the merger after they agreed to sell certain assets and businesses. The companies also received the U.S. antitrust approval for the merger in June. Moreover, the European Commission conditionally approved the merger in Mar 2017.

The companies, last month, also noted that their boards have jointly commenced a comprehensive portfolio review aimed at capturing material value-enhancing opportunities. The board of the combined company is expected to assess the results of this review after the completion of the merger transaction.

The companies continue to work constructively with regulators in the remaining jurisdictions to obtain approval for the merger and continue to expect the closing of the merger to take place in Aug 2017. The merger is projected to deliver cost synergies of around $3 billion and growth synergies of roughly $1 billion. We expect DuPont to provide an update on the merger in its second-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 $1.29. 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 other companies in the basic materials space you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Westlake Chemical Corporation WLK has an Earnings ESP of +5.04% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Chemours Company CC has an Earnings ESP of +4.44% and a Zacks Rank #2.

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