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We’re upbeat on chemicals maker DuPont, despite its narrowed guidance
DuPont de Nemours (DD) delivered a decent third quarter Wednesday, even as the company’s lowered outlook for the full year weighed on its stock. But we remain optimistic the specialty chemicals company’s electronics business will turn next year, leading to revived growth. Net sales for the three months ended Sept. 30 declined roughly 8% year-over-year, to $3.06 billion, missing analysts’ expectations of $3.15 billion, according to LSEG. Adjusted earnings-per-share (EPS) of 92 cents exceeded the LSEG estimate of 84 cents a share, growing 12% year-over-year. Shares of DuPont closed down more than 8% Wednesday, at $66.95 apiece. Bottom line DuPont’s quarter was more or less in line with Wall Street’s expectations, even as the company’s guidance disappointed investors. But taking the longer-term view, there are positive signs that the company’s electronics and industrial business is bottoming, with green shoots materializing on stabilizing sales at the semiconductor technologies subunit and sequential improvement at the interconnect solutions subunit. However, management’s expectation for consumer-electronics demand in the fourth quarter to be similar to that of the third, with some sequential growth in semiconductor technologies, was a disappointment as we expected demand to pick up sooner. DuPont is pointing to a 2024 recovery, driven by growth in PC and smartphone shipments, as well as increasing demand for both artificial-intelligence and traditional servers. “In general, demand for high-performance and high-density memory chips is accelerating, supported by AI growth, as well as overall growth for new mobile product launches. This directly correlates with DuPont’s product strengths within the semiconductor and consumer electronics markets” CEO Ed Breen said on DuPont’s post-earnings conference call Wednesday. Crucially, DuPont typically outperforms growth in the broader semiconductor industry by 200 to 300 basis points because of its exposure to high-end chips. So if the industry can grow in the mid-to-high single digits next year, DuPont’s business will grow even faster than that as it expands its margins through increased volume. That’s what attracted us to DuPont in the first place. It’s an inexpensive way to play the return to growth in the semiconductor-and-electronics industry, which historically has been viewed as a steady grower. But it’s taking an extra quarter than the market had anticipated, generating the post-earnings selling pressure. At the same time, DuPont raised concerns about its water and safety solutions business due to ongoing destocking and a weaker China. It was concerning to see this business flip negative after reporting 1% organic growth in the second quarter, but the water industry in general has historically grown by mid-single digits and it should return to that range in due course. Clearly, DuPont isn’t firing on all cylinders, with revenues down versus last year and its largest end market —electronics — in the bottoming process. But the stock isn’t priced for that, trading at roughly 16-times 2024 EPS estimates. We think that’s too cheap of a multiple for a business that’s troughing, which is why Wednesday’s sell-off is a buying opportunity. Quarterly commentary Revenue at DuPont’s electronics and industrial business — which makes differentiated materials and component solutions for high-performance computing, 5G, electric vehicles, and consumer electronics like smartphones and PCs — declined 9% year-over-year. The segment’s 13% decline in organic sales was partially offset by a 4% boost from its $1.75 billion acquisition of Spectrum Plastics Group. The electronics and industrial segment is comprised of three subunits: semiconductor technologies, interconnect solutions and industrial solutions. Sales at the semiconductor technologies business were down by a high-teens percentage, due to continued inventory destocking and reduced semiconductor fab utilization rates, which is another way of saying output. Sales stabilized from the second quarter, but should improve in the quarters ahead as fab utilization rates increase to around 80% next year and 90% in 2025, compared with 70% currently, according to industry estimates DuPont shared. Sales at the interconnect solutions business were down 11% year-over-year, mainly due to lower volumes of consumer electronics. But an 8% sales improvement on the second quarter was encouraging. This was the second-straight quarter of sequential sales growth for the unit, a clear sign the business is bottoming. Lastly, sales at the industrial solutions business fell by a high-single-digit percentage, due to channel inventory destocking with biopharmaceutical markets and lower electronics demand. But that was partially offset by increased demand for OLED lighting materials. The electronics and industrial segment delivered third-quarter operating margins of just 28%. But the company expects the segment to return to margins around 32% as volumes recover. Meanwhile, the water and protection segment saw revenue fall 8% year-over-year, with an 9% decline in volumes offset by a 1% increase in prices. Sales at the safety solutions and shelter solutions subunits both fell by high-single-digit percentages, with the former impacted by channel inventory destocking and the latter weighed down by soft demand in construction markets. The water solutions subunit proved a surprise, with revenues dropping by a mid-single-digit percentage on lower volumes due to distributor inventory destocking and weaker industrial demand in China. Despite the year-over-year sales decline, the water and protection segment’s operating margins for earnings before interest, taxes, depreciation and amortization increased 70 basis points on an annual basis, to 25.6% DuPont completed a $3.25 billion accelerated share repurchase (ASR) program in September and then launched a new $2 billion ASR, which the company expects to complete in the first quarter of 2024. The combination of these two programs drove a 15% reduction in DuPont’s outstanding share count. The company said Wednesday that it expects to incrementally repurchase stock in 2024 using a portion of excess cash. Guidance DuPont shaved its full-year net sales outlook to about $12.17 billion, from a previous range of $12.45 billion to $12.55 billion. That implies fourth-quarter sales of $3.04 billion, which come in below analysts’ estimates of $3.17 billion. The company expects full-year operating EBITDA to be about $2.98 billion, which is at the low end of management’s prior range of $2.98 billion to $3.03 billion. The revised figure implies fourth-quarter EBITDA of $748 million, which falls short of estimates of $775 million. DuPont narrowed its adjusted EPS for the full year to around $3.45, from a previous range of $3.40 to $3.50 a share. That implies fourth-quarter adjusted EPS of 84 cents versus estimates of 91 cents. The company cited additional channel inventory destocking and slow industrial demand in China, mostly in its water solutions business, for its revised guidance. (Jim Cramer’s Charitable Trust is long DD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Edward Breen, Executive Chairman of DuPont, speaks during an interview on CNBC on the floor at the New York Stock Exchange, June 3, 2019.
Brendan McDermid | Reuters
DuPont de Nemours (DD) delivered a decent third quarter Wednesday, even as the company’s lowered outlook for the full year weighed on its stock. But we remain optimistic the specialty chemicals company’s electronics business will turn next year, leading to revived growth.
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