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DowDuPont Inc. (NYSE: DWDP) reported third-quarter 2017 results Thursday morning before markets opened. The conglomerate posted quarterly pro forma adjusted operating earnings per share (EPS) of $0.55 on pro forma revenues of $18.3 billion. In the third quarter of 2016, the company reported pro forma EPS of $0.50 on revenues of $16.99 billion. Consensus estimates called for $0.42 in EPS and $18.01 billion in revenues.
The former Dow Chemical and E.I. du Pont de Nemours completed their merger on August 31. Pro forma results reflect the results of operations of Dow and DuPont assuming the merger had occurred on January 1, 2017. The newly formed company remains a component of the Dow Jones Industrial Average, replacing DuPont.
Also on a pro forma basis, net income fell 53%, from $494 million to $232 million. Adjusted EBITDA rose by 7%, from $3.02 billion to $3.22 billion, driven by volume and price gains, higher equity earnings, and lower pension costs due to purchase accounting. The gains more than offset higher feedstock costs, weak conditions in agriculture markets, the unfavorable impact of hurricanes, and startup costs related to new assets on the U.S. Gulf Coast.
CEO Ed Breen said:
Our operating earnings increase was the result of broad-based demand growth in most of our core end-markets and disciplined margin management, which more than offset several headwinds, from multiple hurricanes to higher feedstock costs and a delayed start to the summer agriculture season in Brazil. … Going forward, you should expect us to remain focused on executing on our $3 billion cost synergy commitment and advancing preparations to create three focused growth companies in Agriculture, Materials Science, and Specialty Products.
DowDuPont expects to generate those cost savings through procurement savings, layoffs, buildings and facilities consolidation, and shutting down selected assets. In the third quarter, the company recognized pretax charges of $180 million and it expects to recognize total pretax charges of approximately $2 billion, with approximately $1 billion expected in the fourth quarter of 2017. The program is expected to achieve a 70% run rate at the end of 12 months and 100% run rate within 24 months.
The consensus analysts’ estimate calls for fourth-quarter EPS of $0.69 and revenues of $18.92 billion. For the full year, analysts are looking for EPS of $3.30 and $79.18 billion in revenues.
Shares traded up about 0.3% Thursday morning to $73.55, after closing at $73.32 on Wednesday, up 1.4% for the day. The 52-week trading range is $51.60 to $73.85. The 12-month consensus price target on the stock was $78.70 before this morning’s earnings release.
The Institute for Supply Management (ISM) has released its reading on manufacturing activity in October. While it is slightly lower than the prior reading, the reality is that it was at a 13-year high in September. The ISM’s PMI manufacturing index came in at 58.7 in October, lower than the 59.0 consensus expected by Dow Jones.September’s reading was 60.8, the highest back to May of 2004. Of the 18 manufacturing industries, 16 of them reported growth in October.
The pricing index, which is a degree that can be used to measure inflation, was 68.5 in October, down from 71.5 in September. While this was a solid three-point drop, it was well above the 50.0 breakeven and indicates higher raw materials prices for the 20th consecutive month.The employment index, again for manufacturing, was 59.8 in October, compared with 60.3 in September.
Production and order metrics were unilaterally down from September, but most were at strong readings. The new orders index was 63.4 in October, versus 64.6 in September. Production’s reading fell to 61.0 in October from 62.2 in September, and inventories fell to 48.0 from 52.5. Supplier deliveries fell by three points to 61.4 in October.
The ISM report on manufacturing went on to say:
Comments from the panel reflect expanding business conditions, with new orders, production, employment, order backlogs and export orders all continuing to grow in October, supplier deliveries continuing to slow (improving) and inventories contracting during the period. Prices continue to remain under pressure. The Customers’ Inventories Index remains at low levels.While we have used 50.0 as a metric to define growth or contraction — above being growth and below being contraction — the ISM’s report now shows that a PMI reading above 43.3%, over a period of time, generally indicates an expansion of the overall economy. Based on that observation, the October PMI represented growth for 101 consecutive months in the overall economy, and it was the 14th straight month of growth in the manufacturing sector.
Tesla Inc. (NASDAQ: TSLA) reported third-quarter 2017 earnings after markets closed on Wednesday. For the quarter, the electric car maker posted an adjusted diluted loss per share loss of $2.92 on revenues of $2.98 billion. In the same period a year ago, the company reported adjusted earnings per share (EPS) of $71 on revenues of $2.3 billion. Third-quarter results compare to consensus estimates calling for a per share loss of $2.30 and $2.94 billion in revenues.The rise in automotive revenues, from $2.16 billion in the third quarter of last year, to $2.36 billion this year was attributed to a 4.5% increase in Model S and Model X volumes. Sequentially revenues rose about 3% and the percentage of vehicles subject to lease accounting were roughly flat sequentially at 21% of deliveries. The company said it will not offer leases on the new Model 3.
What will set the share price back is an announced delay in the Model 3 ramp to 5,000 units a week from the end of the fourth quarter of this year to the end of the first quarter of next year. Problems with battery production at the company’s Gigafactory 1 in Nevada are named as the primary constraint on Model 3 production.The carmaker had already announced that it delivered slightly 26,137 vehicles in the quarter, including just 222 of the Model 3. Tesla did not say how many cars it produced in the quarter. At the end of last quarter the company said there were 3,500 vehicles in transit to customers that would not be counted until the third quarter. Neither did the company say how many vehicles were in transit at the end of the third quarter that would be counted in revenue for the fourth quarter.it produced 25,708 vehicles in the second quarter.
In its outlook statement, Tesla said it expects Model S and Model X deliveries to be on a pace to reach around 100,000 in 2017, up 30% compared with last year. Shifting production workers to Model 3 will result in production of 10% fewer of the earlier models and decline in finished inventory. Tesla said that Model 3 gross margin should reach breakeven by the end of the fourth quarter and “improve rapidly” in 2018 to the targeted 25% level.The increasing number of lower-margin Model 3 sedans in the vehicle mix will reduce adjusted gross margin to about 15% in the fourth quarter and begin to recover in the first quarter of next year. And Model 3 is the key to it all:
Between cash on hand, future cash flows and available lines of credit, we believe that we are well capitalized to accommodate the revised ramp of Model 3 production to 5,000 per week. Upon achieving this production level, we expect to generate significant cash flows from operating activities.Capital spending is targeted at $1 billion in the fourth quarter to accommodate Model 3 production, Gigafactory work, and additional expansion of stores, service centers, and Supercharger stations.
Tesla’s shares traded down about 4% at $308.00 in Wednesday’s after-hours session after closing at $321.08. The stock’s 52-week range is $178.19 to $389.61. The 12-month price target for the shares was $323.48 before the report with the highest target set at a whopping $500.00.
NOVEMBER NEWSLETTER 1
When Chesapeake Energy Corp. (NYSE: CHK) reported third-quarter 2017 earnings before markets opened Thursday, the oil and gas exploration and production company posted adjusted earnings per share (EPS) of $0.12 on revenues of $1.94 billion. In the same period a year ago, the company reported adjusted EPS of $0.09 on revenues of $2.28 billion. Third-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.11 and $2.07 billion in revenues.
Revenue dropped 15% year over year, likely as a result of a 15% decrease in production volume that was largely driven by asset sales. Chesapeake’s debt balance at the end of the quarter was $9.8 billion, down from the December 2016 total of $10 billion.
The company raised its full-year estimate of capital spending from a range of $2.1 billion to $2.3 billion to a new range of $2.3 billion to $2.5 billion, including $200 million in capitalized interest.
Chesapeake produced 8 million barrels of crude oil the quarter, compared with 8 million in the same period last year and 8 million in the second quarter of this year. The average realized price in the third quarter rose by 68 cents sequentially to $52.33 and from $45.24 in the year-ago quarter. Natural gas production rose by 10 billion cubic feet sequentially, but it fell by 49 billion cubic feet year over year to 219 billion cubic feet. Year over year, gas prices rose by $0.39 per thousand cubic feet but were $0.19 lower than in the first quarter.
Production growth for the full year continues to be forecast in a range of down 1% to up 1%. Based on October 30 strip prices, Chesapeake expects its oil hedges to add $2.61 per barrel to its revenues. Natural gas hedges are forecast to have no impact and NGL hedges are expected to cut $0.20 a barrel from revenues. Interest expense is expected to rise to $2.05 to $2.15 per barrel of oil equivalent production.
Analysts are calling for fourth-quarter EPS of $0.21 per share on revenues of $2.25 billion, as well as EPS of $0.72 per share on revenues of $9.44 billion for the full year.
CEO Doug Lawler said:
As we look toward 2018, our priorities remain unchanged as we focus on further improving our balance sheet, increasing our margins and driving toward cash flow neutrality. While we have not announced details regarding our 2018 capital program, we will maintain a disciplined approach that provides the flexibility necessary to respond to changes in commodity prices. As of today, we anticipate spending less capital in 2018 than 2017 and, given our asset quality and industry-leading capital efficiency, we expect to deliver flat to modest production growth on a lower capital expenditure.
The average production cost in the second quarter was $3.03 per barrel of oil equivalent, up from $2.92 sequentially and up from $2.80 year over year.
The good news for Chesapeake is that operating cash flow rose from $214 million a year ago to $337 million. Sequentially, operating cash flow rose by $21 million. Now if the company could just shave its interest expense per barrel of oil equivalent from $2.26 to something closer to the $1.20 per barrel it posted in the third quarter of 2016.
The combination of increased costs, fewer assets and rising interest expense presents the company with an existential problem that may turn into a crisis. Shares have tumbled 44% this year, and today’s report won’t turn that around.
Chesapeake’s shares traded down about 5% Thursday morning to $3.72. They have a 52-week trading range of $3.41 to $8.20. The consensus target price for the shares was $4.64 before this report. The highest price target prior was $8.00 a share
MANUFACTURING GROWTH SLOWED