DuPont (NYSE:DD) gets plenty of well-deserved credit for continually remaking itself over the years, and maintaining a focus on markets where it can reap meaningful economic returns. Just because DuPont is well run, however, doesn't immunize it from the markets it serves, and the third quarter saw a big shortfall in volume, revenue and earnings. While I think DuPont remains a high-quality specialty chemicals company with a strong dividend, the value case is a little more challenging to make.

Forex Broker Guide: Using the right broker is essential when competing in today's forex marketplace.

A Bad Third Quarter
The third quarter of 2012 is going to go down as a quarter to forget for investors, fund managers and bullish analysts. In that respect, DuPont's disappointing performance is not really all that startling or exceptional.

Revenue fell about 9% on an operating/pro forma basis, with a 5% decline in volumes weighing on performance. Digging into volume a little further, DuPont saw a 10% decline in Asia, a 6% decline in Europe and a 2% decline in North America. Looking at product categories, performance chemicals (-19%) and electronics (-28%) led the declines, as the company took a one-two punch from weaker titanium dioxide and photovoltaic markets.

Profitability was also challenged this quarter, as pre-tax operating income (PTOI) dropped almost one-quarter. As was the case with sales volume, performance chemicals and electronics led the decline and the company saw almost two points of PTOI margin erosion.

SEE: Profitability Indicator Ratios: Profit Margin Analysis

Even the Strong Areas Weren't That Strong
Depending on how you choose to look at it, more than half of DuPont's units had relatively decent quarters. Agriculture saw 4% revenue growth (but a 23% decline in PTOI) in what is generally a seasonally weak quarter. Even here, DuPont continues to lose share to Monsanto (NYSE:MON) and it may be difficult for DuPont to reverse that process in the near term without resorting to price competition.

Industrial biosciences and nutrition/health were also relatively solid - neither posted especially strong revenue growth, but both saw good improvement in operating profitability. DuPont saw good sales into the carpeting industry (and floor covering companies such as Mohawk (NYSE:MHK) and Interface (Nasdaq:IFSIA) have been strong lately), while demand for its Solae soy products continues to be strong. Performance materials are also performing relatively well - while the 8% sales decline doesn't look great, volume was up 2%, profits were up 33% and demand in packaging and autos has been solid. This should be good news for Dow (NYSE:DOW) as well.

SEE: Analyzing Operating Margins

How Long Will Weakness in Solar and TiO2 Persist?
The two biggest problems for DuPont this quarter were weak sales of titanium dioxide and photovoltaic products. While declining TiO2 prices will be good for paint manufacturers such as PPG (NYSE:PPG) and Akzo Nobel, it will probably take time for this market to rebound (though it's worth noting that this quarter was a difficult comp). As for photovoltaics, it's anybody's guess - the solar industry continues to go through a very painful adjustment, led in part by the collapse of industry subsidies as well as lower building/construction activity.

The Bottom Line
DuPont is going to launch another restructuring effort, and this could drop more than 30 cents per share to the bottom line on an incremental basis. Nevertheless, for all of DuPont's innovation and focus on positioning its portfolio for growth markets, the fact remains that the company's performance is tied fairly closely to global GDP - and the outlook for 2013 hasn't been getting better of late.

DuPont offers an attractive 3.8% dividend and I think this is a well-run company. That said, it's harder to make a value case for the stock. The stock looks more or less fairly valued on a forward EV/EBITDA basis, and a free cash flow analysis likewise does not point to any particular undervaluation. On the other hand, DuPont likely won't get especially cheap unless there's a large amount of pessimism about global growth (and/or a big pullback in the market), so this may be one of those "be careful what you wish for" situations for investors.

At the time of writing, Stephen D. Simpson owned shares of Monsanto since 2010.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center