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Truman
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DuPont’s exposure to hot semiconductor market drives flurry of good news (79.14 +3.77)

Chemical company DuPont (DD) had plenty of good news to share this morning. Not only did DD exceed 4Q21 EPS and revenue expectations, but it also announced a new $1.0 bln stock repurchase plan and a 10% hike to its quarterly dividend. DD may not be the first company that comes to mind when thinking about semiconductors, but its significant exposure to the industry fueled its strong results. Specifically, DD’s Electronics & Industrial segment, which generated Q4 sales growth of 19%, provides specialty materials that are used in the fabrication and packaging of semiconductors.

This earnings season has featured impressive earnings reports from several chip makers — Texas Instruments (TXN), Qualcomm (QCOM), and Cirrus Logic (CRUS) are a few that come to mind — so DD’s bullish commentary on the demand environment is not surprising. In particular, the company noted that demand strength was driven by the ongoing transition to advanced technologies, such as high-performance computing and 5G communications. This favorable environment enabled DD to boost prices by 7% in Q4, mitigating inflationary pressures.

In DD’s Water & Protection segment, the healthy residential construction market in North America helped push organic sales higher by 17% to $1.4 bln. Some key products underlying the solid growth include decorative surface materials, water filtration systems, weatherization waterproofing, and sealants.

While these positives outweigh the negatives, DD’s report wasn’t entirely pristine. A few items that blemish the company’s upside results and shareholder-friendly capital allocation plans include:

Due to persistent raw material and logistics cost inflation, margins are expected to be negatively impacted in 1Q22. On a sequential basis, operating margin is projected to be roughly flat, with improvements anticipated later in 2022.
Relatedly, DD’s Q1 EPS guidance of $0.94-1.00 fell short of estimates.

Supply chain constraints within the auto manufacturing industry continue to weigh on DD’s Interconnect Solutions business. Chip shortages have caused many auto OEMs to cut back or halt production, hurting demand for DD’s automotive-related products, such as printed circuit boards and display materials.

The Mobility & Materials segment continues to be a laggard, with operating EBITDA falling by 3% yr/yr to $230 mln despite generating 13% organic sales growth. Since this business primarily sells lower-margin products like resins and adhesives, it’s more susceptible to rising raw material costs.

Weakness in Mobility & Materials isn’t overly concerning, though, because DD plans on divesting a substantial portion of this segment.
DD isn’t firing on all cylinders, as supply chain disruptions continue to hinder its auto-related businesses. However, its exposure to the robust semiconductor and residential construction markets is largely offsetting supply chain and inflationary pressures. In turn, these dynamics facilitated strong Q4 results and the confidence to authorize a dividend increase and new buyback program.