DuPont (DD) lowered its 2011 full-year earnings outlook Friday, noting slower growth in certain segments during the fourth quarter as a result of global economic uncertainty. Since our fair value estimates are based on a firm’s long-term projections to arrive at its intrinsic value, we are sticking with our fair value estimate for DuPont at this time. In short, we think DuPont still remains on track to achieve our long-term projections, despite the downward revision to this year’s earnings today.
In DuPont’s release, management indicated the earnings slowdown reflects:
“destocking across polymers and certain industrial supply chains than accelerated during the fourth quarter. Consumer electronics demand has further softened, and housing and construction markets remain weak.”
We’re taking this news, in light of weakness out of Texas Instruments (TXN) and other chipmakers, as evidence that the widespread global macroeconomic uncertainty coupled with the European debt crisis is starting to creep into the growth rates of domestic multi-nationals. Importantly, DuPont just raised its earnings guidance in October, so reducing it today is a huge red flag for the economic environment during November and December.
That said, global macroeconomic uncertainty seems to be only impacting the pace of growth–not causing a significant drop in earnings. For example, DuPont’s (DD) revised earnings for this year still represent as much as a 20% increase from 2010, so this is still nice growth. However, we’re growing more cautious that the fear of a global recession—rather than a global recession itself–is causing corporations to tighten their budgets and become more conservative with cash/inventory purchases (similar to what we witnessed out of corporations during the debt ceiling debate). Both the chipmakers and DuPont have noted that consumer inventories remain light. But we don’t view this as a permanent condition, and a rebuilding of inventories should be expected as global economic uncertainty inevitably passes—the only contingency being timing.
DuPont’s cautious position on consumer electronics runs counter to what we’ve seen out of the burgeoning smartphone market (even the chipmakers are seeing strength here), but yet is consistent with what 3M (MMM) mentioned in its most recently-reported quarter regarding its LCD film segment. We think there are winners and losers in the consumer electronics market (rather than across-the-board strength), and 3M and DuPont, for example, are levered to the latter. On a bright note, DuPont did mention that other markets—outside of consumer electronics and housing—remain strong, namely the agricultural and food businesses. This is consistent with what we’ve seen out of the likes of Caterpillar (CAT) and Deere (DE).
All things considered today, we’re getting some good data points through the month of November that