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DuPont (NYSE: DD ) has entered the final period of 2013 having accomplished several major changes during the first three quarters of the year. But there's almost certainly one other large transaction still ahead.
As you likely have observed, the big agricultural and chemicals company chalked up $0.45 per share in third quarter operating income, topping the consensus estimate of $0.41. At the same time, at $7.73 billion, it fell ever-so-slightly short of the $7.78 billion revenue forecast that had been established for it.
The real question concerning the company, however, is precisely where it's headed. For the moment, there remain those who are inclined to compare it first with Dow Chemical (NYSE: DOW ) , which while operating an agriculture unit, remains largely a chemicals concern. However, DuPont CEO Ellen Kullman and her team have guided their company toward a significantly increased emphasis on agriculture, nutrition, and related areas, a la Monsanto (NYSE: MON ) .
Indeed, a look at some of the significant transactions completed on Kullman's watch leaves little doubt about the direction that's been established for the company:
- In 2011, DuPont paid $6.3 billion, including debt assumptions, for Danisco, a Danish company (as its name would imply) involved in enzymes and specialty foods.
- In 2012, the company bought the 28% it didn't already own in Solae, a St. Louis-based developer of soy-based ingredients.
- In February of this year, it completed the sale of its automobile paint unit to private equity firm Carlyle Group (NASDAQ: CG ) for $5 billion.
- In July, following a lengthy three-year process, DuPont acquired an 80% interest in South Africa's Pannar Seed. DuPont plans to plow significant research and development funding into the unit in an effort to bring about meaningful improvements in agricultural science on the continent.
A darkening whitening producer
But there remains one rub at the company that has more than a few analysts less than amused: While its performance chemicals segment saw its revenues increase by 12% during the most recent quarter, operating earnings tied to the unit plummeted by 38%. That steep decline resulted largely from sliding prices for titanium dioxide (a whitening agent), refrigerants, and fluoropolymers.
Conversely, revenues from agriculture expanded by 15%, while the segment's operating earnings improved by 11%. The latter figure was still written in red ink, however, since the third quarter is typically seasonally slow as it relates to seed, pesticide, and fertilizer shopping by farmers. Nevertheless, the company anticipates a modest profit for the current quarter from the ag unit, an unusual fourth quarter achievement.
The same final quarter of 2013 could see an announcement that performance chemicals is being jettisoned. In discussing the approaches that management is examining for the underperforming segment, Kullman stated that she and her colleagues are "moving with a sense of urgency."
There are those who believe that, even in its weakened state, performance chemicals could fetch nearly $15 billion, based on a 2-times multiple of its 2012 revenues. While that prognostication seems a little rich, anything approaching that price tag would do wonders for the company's balance sheet and for management's ability to lasso additional agriculture-related acquisitions.
Still headed higher?
What does all this mean for those who might be considering purchasing DuPont shares? To arrive at something of an empirical indication, let's compare DuPont to the aforementioned Monsanto and Dow Chemical. In the most recent quarter, DuPont's agriculture and related segments accounted for 36% of total corporate revenues. Without performance chemicals in the mix, that share would have risen to 46%.
At Monsanto, agricultural products make up virtually all of the company's revenues. But Dow Chemical's third quarter report on Thursday indicated that agriculture constitutes just 10% of its total revenues. As to respective valuations, DuPont trades at about a 14 times forward earnings, similar to Dow, but well below the 18.3-times forward multiple accorded to Monsanto.
Given DuPont's headlong drive to boost agriculture's share of its operations, along with an avowed determination to take an appropriate action with its performance chemicals laggard, it appears logical to anticipate that, in a 2015-2016 time frame, agriculture could constitute 65% to 75% of the company's total sales, likely moving its valuation closer to Monsanto's.
On that basis, and despite a 31% jump in its shares year to date, I see little reason to suggest that Fools shouldn't carefully consider initiating or adding to positions in venerable, but rapidly changing, DuPont.
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