What a solid comeback it has been for DuPont's stock this year! After ranking among the worst performers in the Dow Jones Industrials in 2012, DuPont's shares have gained 24% year to date, even hitting a multi-year high just yesterday on news from CNBC that Nelson Peltz's Train Fund Management has scooped up a large stake in the company. The news comes just days before DuPont is to release its second-quarter earnings report. Timing, eh?

Aiming for a new high? Image source: Company website


While the Peltz investment news is not official yet, it might tempt you to dive into DuPont. I'd advise you to wait until next week, when DuPont puts up its second-quarter performance numbers on the table. Expectations from the company are low, and headwinds are strong.

Expect a soft quarter
The Street is expecting DuPont's revenue, as well as earnings per share, to fall 9% each, year over year. Analysts' EPS estimate of $1.27 per share might even hit the bulls-eye, going by the company's own estimate of a 10% lower first-half operating EPS (excluding one-time items), announced recently at the Deutsche Bank Global Industrial and Basic Materials Conference.

DuPont is banking largely on its agriculture business for growth on the top line, when other businesses are still in the rut. In its first quarter, agriculture not only accounted for the largest share of its total revenue (30%), but was also the only division to report a double-digit growth in sales. But with the world's largest seed company, Monsanto , delivering flat corn and soybean seeds and traits sales in its last quarter, DuPont is unlikely to deliver anything great next week.

Nevertheless, the agriculture business is seasonal, so one quarter will not tell you much about DuPont's future, and it isn't DuPont's core business. So, to get a better picture of where the company is headed, you might want to pay closer attention to the state of things in DuPont's chemicals business.

The real pain
The titanium dioxide business was the biggest drag for DuPont last year, as demand for the pigment, which is used primarily in paints, softened globally. This year has been encouraging so far, with most TiO2 producers witnessing an uptick in the demand for the pigment. While DuPont reported an 8% sequential rise in TiO2 sales volumes during its first quarter, Huntsman saw its first-quarter TiO2 volumes rise 27% sequentially. Furthermore, Huntsman scaled down production during the quarter to reduce inventory, and feels that a better balance between demand and supply should help the industry bounce back during the second half of the year.

Investors should watch for DuPont's inventory situation in its upcoming earnings call. If TiO2 sales volumes continue to rise and the inventory level reduces, it could confirm the much-awaited turnaround of the pigment business. Nevertheless, investors might have to wait for another quarter to see revenue from DuPont's pigment business grow despite higher volumes, because its TiO2 price increases became effective starting July.

The big challenge
Investors must also watch for any signs of reversal in DuPont's electronics and communications business, which has been another sore area for several quarters. Until demand for photovoltaic materials pick up, DuPont will feel the pressure: Q2 2012 was particularly strong for DuPont, so year-over-year comparisons could look morbid.

The question is: When will the streak of losses end? DuPont has a tougher challenge in hand than peers like Dow Chemical . That's because Dow has a much stronger foothold in the consumer smartphones and tablets market. According to Dow, an amazing 95% of smart devices have the company's materials in them. That's probably one reason why Dow's sales from its electronics and functional materials business improved 2% year over year in the last quarter, even as DuPont reported a 9% fall in sales from the division. DuPont probably needs to rethink its business strategy, and it will be important to see how DuPont plans to shake up the business.

Foolish takeaway
With DuPont's key businesses reeling under pressure, it will likely be a dismal second quarter for the company. DuPont's outlook might also leave investors asking for more, especially when Monsanto reaffirmed its full-year EPS despite a soft last quarter. At the lower end, Monsanto is aiming for 20% growth in EPS year over year. Last heard, DuPont expects its full-year operating earnings to be somewhere around $3.85 per share, which would mean an uninspiring improvement of 2% over 2012. Let's see what DuPont has to say next week.

To make sure you do not miss the detailed analysis of DuPont's earnings release, click here to add the stock to your stock watchlist.

DuPont might not be the top stock right now, but there's another one which the Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

 

The article 1 Reason This Fiery Stock Could Soon Cool Off originally appeared on Fool.com.

Fool contributor Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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