Why These Chemicals Giants Have Promising Futures

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Global populations continue to rise, which will result in greater demand for food in the years ahead. This is particularly true in the emerging markets, where outsized economic growth places even greater pressure on the search for sustainable sources of food. Thankfully, the world's major chemical and seed companies are investing heavily to meet the ever-changing global food landscape.

Rising demand for products and services offered by DuPont (NYSE: DD  ) , Dow Chemical (NYSE: DOW  ) , and seed giant Monsanto (NYSE: MON  ) means these companies should produce strong growth in the years ahead. As a result, investors should consider these industry leaders as viable candidates for investment.

Meeting global challenges
DuPont has taken huge strides in expanding and strengthening its business over the past few years. Chairman and CEO Ellen Kullman has laid out an aggressive growth plan for DuPont, with management calling for 12% compound annual earnings growth over the long term.In its last annual report, DuPont took great pride in the fact that 2012 was a record year for new product introductions. Furthermore, DuPont secured 935 U.S. patents last year, the most in the company's history, and the second year in a row in which DuPont set a new record for itself. 

DuPont is also taking measurable steps to shore up its balance sheet by shedding assets the company believes to be non-critical. Last year, DuPont sold its Performance Coatings business for $4.9 billion, the proceeds of which will be used to strengthen its balance sheet and buy back its stock.

On the subject of strong balance sheets, Monsanto is definitely part of the conversation. The company boosted its cash position by $800 million last year. Moreover, Monsanto's total debt outstanding decreased by $147 million in 2012.

Smaller chemicals competitor Dow has reduced volatility of its underlying operations by divesting single-digit margin businesses. All told, the company shed $8 billion in underperforming businesses, while simultaneously acquiring specialty businesses such as Rohm and Haas that the company believes will offer higher returns and margins.

Collectively, Dow has organized its strategic priorities in an initiative termed the Efficiency For Growth plan. The goal of this is to strengthen the company's balance sheet as well as optimize its working capital. The company has improved its debt to total capital position over the past few years. In 2009, the company's net debt to total capital ratio was more than 4x. That same metric sits at roughly 2x today. Its EFG program, as well as significant cost reductions, led management to project $35 billion in cash from operations between 2009 and 2015, and the company is well underway in achieving this objective.

Emerging market growth a key driver of future profits
DuPont, Monsanto, and Dow each understand where the growth is geographically, and that's largely in the emerging markets. These companies have invested heavily into under-developed economies, where emerging middle classes and above-average economic growth will serve as key drivers of future demand for their products.

DuPont has invested heavily in new major research centers in developing nations such as China, India, and Brazil, and all told, generated 62% of revenue from outside the United States last year. In particular, DuPont is increasing its exposure to emerging markets. The company realized 34% of its total 2012 net sales from developing markets, up from 33% in 2011 and 31% in 2010.

Meanwhile, Monsanto generated 45% of its 2012 net sales from outside the United States. Above-average growth is being realized in several emerging economies, including Brazil and Asia-Pacific, where sales grew 25% last year and 21% since 2010, respectively.

For its part, Dow is deriving a larger percentage of its revenues from emerging markets than ever before. Over the past five years, Dow has increased the percentage of revenue from emerging markets by seven percentage points, from 28% in 2008 to 35% today. As the company notes, achieving close proximity to its customers will help lower costs and improve profitability going forward.

Stronger balance sheets and emerging markets are twin catalysts
DuPont, Monsanto, and Dow have proven themselves to be the leaders in solving the world's constantly changing food needs. They have each undertaken plans to streamline their businesses, focusing on the best opportunities going forward. Furthermore, all three have shed non-performing segments and used the proceeds to bolster their balance sheets and provide compelling cash returns to shareholders through dividends and buybacks.

As a result, DuPont, Monsanto, and Dow have bright futures ahead of them and should be considered for investment by both growth and income investors alike.

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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On October 21, 2013, at 6:01 PM, nomofunfun wrote:

    Another fine article on the chemical industry and comparisons!

  • Report this Comment On October 21, 2013, at 6:04 PM, nomofunfun wrote:

    I also like seeing much of the story featuring the superior-managed DuPont and its resounding success story.

    "DuPont is also taking measurable steps to shore up its balance sheet by shedding assets the company believes to be non-critical. "

    Sometime, when shedding non-critical assets, sadly some employees get the ax. Hopefully said employees don't spend the next decade slamming DuPont on various message boards like this one and Yahoo.

    Best to leave with a smile, a severance package, and knowing you can always find a job working for dubiously- operated Monsanto and its frankenfoods outlets.

  • Report this Comment On October 21, 2013, at 9:22 PM, funfundvierzig wrote:

    DuPont's PR-driven Management may brag about securing nearly 1000 patents last year, but the multitude of patents does not necessarily translate to profitable innovations. Indeed and in fact, DuPont's last two grossly over-hyped "innovations" in the agricultural arena have turned into massive and costly failures:

    * The Company's failed attempt to create and commercialise a first-generation genetically-modified seed trait to compete with superior-performing Monsanto. DuPont OptimumGAP cannot be planted by farmers in their fields "without risk."

    * DuPont Imprelis, a falsely, if not fraudulently "very environmentally friendly" dandelioni lawn treatment turned out to a highly effective killer of mature landscaping trees, triggering tens of thousands of claims for losses.

    DuPont Imprelis is the most costly new product failure and ensuing environmental disaster in 21st century corporate America! Imprelis may ultimately cost DuPont's long suffering shareholders as much as $3 billion or more, in our conservative estimation. DuPont's customarily secretive and evasive Management and their PR pros have been keenly effective in downplaying and spinning the true magnitude of this fiasco.


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