DuPont's encouraging outlook for 2H23 provides impetus to look past soft Q1 guidance
Briefing.com
Chemical company DuPont (DD) parlayed another round of price increases and continued strength in its Water & Protection segment into a solid 4Q22 earnings beat, exhibiting resiliency in a difficult macroeconomic environment. Those price increases also drove organic sales higher by 5%, which is a more meaningful top-line gauge than total revenue. Recall that DD closed on the sale of its Mobility & Materials unit to Celanese (CE) last November, skewing the yr/yr comparisons and explaining why DD's Q4 total revenue plunged by 28% to $3.1 bln.
The company's twelfth consecutive quarterly EPS beat wasn't the only piece of good news.
After hiking its quarterly divided by 10% last year, DD is again increasing its payout -- this time by 9% to $0.36/share. With growth hard to come by due to rising interest rates and other lingering issues, more emphasis has been placed on dividends as a means of generating stronger returns. Furthermore, DD's willingness to bump its dividend higher despite the uncertain global economic outlook is a confidence booster, indicating that the company doesn't foresee a prolonged and painful downturn on the horizon. While shares are trading sharply higher at the moment, the initial reaction to the earnings report was not positive.
Offsetting the EPS beat and dividend hike was DD's downside 1Q23 EPS and revenue guidance. The soft outlook was mainly driven by ongoing weakness in certain consumer-based end markets, such as smartphones and electronics. Some may not realize it, but DD has significant exposure to the semiconductor industry, providing specialty materials that are used in the fabrication and packaging of chips.A deceleration in demand and COVID-related impacts in China have created a glut of inventory for consumer electronics OEMs. As a result, DD's Interconnect Solutions experienced an organic sales decline of 10% in Q4 on volume declines due to channel inventory destocking, more than offsetting strength in DD's broad-based industrial markets. For the quarter, the Electronics & Industrial segment posted an organic sales decline of 2%.Looking ahead, the company expects this weakness to continue, as illustrated by its forecast for a mid-single-digit decline in 1Q23 for these consumer-driven end markets.
However, DD issued inline EPS and revenue guidance for FY23, suggesting that it anticipates a rebound in 2H23. Indeed, CFO Lori Koch stated that as the year progresses, she anticipates a stabilization of consumer electronics demand and a normalization of customer inventory levels to drive sequential quarterly improvements in DD's results. More specifically, she believes that channel destocking and customer production rates will begin to improve in 2Q23.Meanwhile, demand within the auto adhesives and water protection categories should remain healthy moving forward, positioning DD for a potentially strong 2H23.
