Does DuPont Have It All?

Chemical companies clearly had the wind at their backs in the last quarter. Most of them came up with outstanding numbers as their strategy of passing on higher costs to customers proved fruitful.

Chemical giant DuPont's (NYSE: DD  ) superb third quarter encouraged it to raise its full-year earnings guidance. And that made me curious -- how good is DuPont looking as an investment now? I'll try and give you a detailed outlook on the company to help you figure it out.

Making good money
DuPont's bottom line grew at a compounded average rate of 7.4% over the past five years. Though this might not appear very impressive, what's important to note is the strong growth in its top line.

In the third quarter, DuPont's revenue grew 32%, boosting its bottom line by 23% from last year, thanks to titanium dioxide prices. DuPont has been raising prices of this pigment aggressively in the last few months. This is evident from the 20.2% revenue growth in the last 12 months. Compare this with a relatively lower five-year rate of 6%, and you'll get an idea about how high prices are boosting DuPont's top line.

The good part is that this high price benefit is likely to stay for some more time. This should mean robust revenue for DuPont in the near future.

Growing bigger
In the last few months, DuPont has kept a strong focus on innovative products while strengthening its foothold in the emerging markets. Almost 31% of last year's sales came from products that were less than 4 years old. DuPont added another feather to its cap recently by winning approval for two new products that has been due for some time.

DuPont's keen interest in the emerging markets is impressive. This year alone it opened innovation centers in South Korea, Taiwan, Thailand, and India. Together, developing markets now represent almost one-third of DuPont's sales, which is definitely praiseworthy. Considering this, expanding further in these fast-growing regions should add a lot of value to DuPont's business.

With the acquisition of food company Danisco this year, the share of sales from DuPont's agriculture and nutrition segments is increasing. What has impressed me is the quick integration of this acquisition, which contributed 12% to DuPont's third-quarter sales.

There is no doubt DuPont is growing bigger. But how attractively is DuPont priced? Let's see.

Sound financials
DuPont's expansionary investments have resulted in a debt-to-equity ratio of 128.9%. But note the huge war chest DuPont has -- its total cash and equivalents stands at a solid $2.75 billion, while unlevered free cash flow is at $1.55 billion as of Sept. 30. DuPont looks comfortably placed to service its debt obligations with such high cash balances and an interest coverage ratio of 7.9 times.

Value insights  
Let's take a look at how DuPont stacks up against its peers:

Company

Trailing P/E

Forward P/E

P/BV

DuPont 16.5 11.1 3.9
Dow Chemical (NYSE: DOW  ) 11.3 10.4 1.6
Kronos Worldwide (NYSE: KRO  ) 8.2 6.1 2.6
Huntsman (NYSE: HUN  ) 9.1 6.1 1.4
PPG Industries (NYSE: PPG  ) 13.8 12.1 3.6
Eastman Chemical (NYSE: EMN  ) 9.3 8.5 2.8

Source: S&P Capital IQ.

DuPont might not look like a bargain if you look at the trailing P/E. But with earnings expected to grow, its forward P/E drops dramatically. This could hint at a good possible upside for DuPont, as expected earnings growth hasn't really been factored in its price yet.

DuPont's high price-to-book value also does not necessarily mean that the stock is overvalued. DuPont's return on equity, at 34.2%, is impressive even considering its high debt load, so the market seems to be factoring in DuPont's strong fundamentals.

What's more, DuPont has a great dividend yield of 3.4%.

The Foolish bottom line
DuPont is one of the few companies that are expanding their titanium dioxide capacity. Such solid growth moves, superb operational performance, and great global presence are reasons enough to be bullish on the company. DuPont seems to be a great package of good business performance with solid dividends. Any dip in its price, and it could be a great grab.

To stay up to speed on the top news and analysis on DuPont, or any other stock, click here to add it to your watchlist.

Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. 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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  • Report this Comment On December 06, 2011, at 6:50 PM, funfundvierzig wrote:

    Several points to keep a balanced view of this old-line chemical conglomerate based in Delaware:

    * With free cash flow under pressure and the balance sheet laden with debt, DuPont Management will very likely jettison the Company's auto paints. This segment brings in circa $4 billion in sales yearly, or last year around 12% of total revenues.

    * The Company's biggest new product of the year, bombed big time. DuPont Imprelis, a turf weed-killer advertised falsely as "environmentally friendly" has killed or damaged hundreds of thousands of mature landscaping trees nationwide. Imprelis was quickly banned by the U. S. EPA, in July, leaving DuPont with substantial losses and charges.

    * The volume of DuPont sales in Q3 2011, year-over-year was FLAT, up a paltry 1% by volume. The apparent "sustainable growth" came about from price inflation, currency translations, and portfolio adjustments.

    * With soaring TIO2 ore costs, DuPont is facing a profit squeeze in the production of its mainstay profit-maker, TIO2.

    ...funfun..

  • Report this Comment On December 07, 2011, at 6:56 AM, funfundvierzig wrote:

    As of the end of 2010, DuPont was on the hook for a staggering $10 billion of unfunded liabilities for pension and other employee benefit plans. The DuPont balance sheet may not be as healthy as it appears at first glance.

    ...funfun..

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