Has DuPont Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if DuPont (NYSE: DD  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at DuPont.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

5.6%

Fail

 

1-Year Revenue Growth > 12%

15.4%

Pass

Margins

Gross Margin >
35%

28.4%

Fail

 

Net Margin > 15%

7.7%

Fail

Balance Sheet

Debt to Equity < 50%

140.7%

Fail

 

Current Ratio > 1.3

1.58

Pass

Opportunities

Return on Equity > 15%

27.5%

Pass

Valuation

Normalized P/E < 20

15.85

Pass

Dividends

Current Yield > 2%

3.8%

Pass

 

5-Year Dividend Growth > 10%

2.6%

Fail

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at DuPont last year, the company has yet again kept the same score it's had for three years in a row. But the shares haven't held up well, with the stock falling about 5% over the past year.

DuPont came into 2012 with plenty of good prospects. Although the stock didn't fare particularly well in 2011, soaring titanium dioxide prices helped pad sales and led the company to announce an expansion to allow for increased production of TiO2 by 2014.

Yet while Huntsman (NYSE: HUN  ) and Eastman Chemical (NYSE: EMN  ) also shared in the success for specialty chemicals, what really has distinguished DuPont lately has been its diversification toward the agricultural industry. With big jumps in seed sales, DuPont is standing up to rival Monsanto (NYSE: MON  ) in a big way that's supporting its growth and making up for less than stellar conditions in other divisions, such as its electronics and communications division.

Still, everything hasn't gone perfectly for DuPont. In its most recent quarter, ag sales growth slowed to just 4%, with pre-tax earnings posting a big decline. Other major divisions saw revenue contraction, leading to an overall drop of 9% for the quarter, missing estimates by a wide margin. That's consistent with the results that Dow Chemical (NYSE: DOW  ) posted, and both companies announced job reductions to help cut costs.

For DuPont to improve, it needs its restructuring process to start bearing fruit with more profit growth. Once margins get better and the company starts working down its debt, DuPont will be in a better position to approach perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

DuPont is a proud member of the Dow Jones Industrials, but is it the best the average has to offer? Find out by accepting my invitation to read the Fool's popular special report, The 3 Dow Stocks Dividend Investors Need. It's absolutely free, so just click here and get your copy today.

Click here to add DuPont to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Monsanto. 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2012, at 6:58 PM, funfundvierzig wrote:

    DuPont is hardly the Perfect Stock, but this struggling old-line chemical conglomerate has been hit by the Perfect Storm:

    * Gale-force headwinds from soaring costs from its notorious failure in new products--DuPont's tree-killing turf herbicide Imprelis, now banned by the U. S. EPA. A $billion-plus disaster.

    * A veritable flood of claims and lawsuits driven by Imprelis.

    * A storm surge of demoralisation pervading surviving regular employees in fear of layoffs, firings, and cut-backs.

    * The whopping federal jury of verdict of $1 billion payable to Monsanto after the jury found that DuPont has deliberately stolen and used superior patented seed know-how from Monsanto.

    * A potential storm surge of litigation: The final conclusion of the C8 Science Panel in West Virginia that not only is exposure to DuPont's extraordinarily toxic Teflon chemical, C8 or PFOA linked to two cancers, ulcerative colitis, preeclampsia, thyroid disease, but now also high cholesterol.

    Merely the independent observations of one individual DD shareholder...funfun..

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