DuPont Upgraded - Analyst Blog

Credit rating agency Moody's Investors Service, an arm of Moody's Corp. (MCO), has upgraded its outlook on E.I. Du Pont de Nemours & Co. (DD) to "Stable" from "Negative", reported Associated Press. The rating agency also affirmed its investment-grade A2 senior unsecured and Prime-1 commercial paper ratings. Moody's judges debt rated A as upper-medium grade, subject to low credit risk but susceptible to impairment over the long term.

Despite the slow US economic growth, the agency anticipates DuPont to exhibit strong credibility in the next couple of years. The company should benefit from a stronger agricultural market, cost-cutting initiatives, a weaker U.S. dollar and growth in developing markets, which should reduce the risk of DuPont underperforming due to weak market conditions.

However, Moody's remains wary of DuPont's leverage ratios. DuPont's debt-to-capital ratio has remained above 50% in the last three quarters. Moreover, high capital outlay and pension fund contribution are further pressuring cash flows. We think DuPont's drug patent expirations of Cozaar/Hyzaar that adversely affected net income in the third quarter of 2010 is a major concern. Pharmaceutical royalties declined considerably in the third quarter of 2010 and Pharmaceutical earnings are expected to decline further by 13 cents per share in the fourth quarter of 2010.

Yet, DuPont has a history of outperforming the Zacks Consensus Estimate. The company exceeded the Consensus Estimate in all the trailing four quarters, leading to a positive average surprise of 16.89%. This inspires optimism on the stock. For the upcoming quarter and full year 2010, the Zacks Consensus Estimate is pegged at 31 cents and $3.11 per share. We note that 4 out of 13 analysts providing estimates have upped their earnings forecasts for the next quarter while only 1 has downgraded estimate over the last 30 days. For the full year, we see 2 positive estimate revisions with no opposite revisions.   

DuPont has a short-term Zacks #2 Rank (Buy) and a long-term (6+ months) Outperform recommendation.

 
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