How DuPont Crushed Dow Chemical and the Dow Jones Industrials in 2013

Chemical giant and Dow component DuPont (NYSE: DD  ) has had an excellent 2013, posting gains of more than 41% so far this year. Not only is that better than the 23% gain that the Dow Jones Industrials (DJINDICES: ^DJI  ) have seen year to date, it also stands well above what chemical industry peer Dow Chemical (NYSE: DOW  ) has managed to achieve. Given the stock's outperformance, DuPont investors want to know what's behind the company's strength and whether it's likely to persist into 2014 and beyond.

DuPont has worked hard to reinvent itself, going beyond its roots as an industrial chemical company to identify the huge opportunity in agricultural chemicals, fertilizers, and seed products that help the farming industry boost crop yields and feed an increasingly hungry world. Seizing on Monsanto's (NYSE: MON  ) success, DuPont has taken big steps forward in realigning itself as an ag-focused company, and investors have supported that long-term strategy and its promise. Yet some investors remain uncertain about how much more growth DuPont can squeeze from seeds and other agricultural products. Let's take a closer look at what moved shares of DuPont in 2013.

Stats on DuPont

Current Trailing P/E

12

1-year revenue growth

1.1%

1-year earnings growth

57.7%*

Dividend yield

2.9%

Source: S&P Capital IQ. * Includes impact on earnings from discontinued operations involved in sale of DuPont's performance-coatings business.

DD Total Return Price Chart

DuPont Total Return Price data by YCharts.

Why has DuPont stock done so well in 2013?
As you can see above, DuPont started breaking away from the Dow's returns early in the year, with a big jump in late April and early May starting the chemical giant on its path toward outperformance. Fundamentally, investors have applauded the company's many moves toward transforming itself into a higher-margin company with better growth prospects.

DuPont started reaping the benefits of its transformation early on in the year. The company's first-quarter results showed the disparity between the company's two main businesses, as agricultural revenue rose 14% even as performance chemicals saw sales plunge 17%. Those results were consistent both with the success that Monsanto saw and the relatively lackluster performance of Dow Chemical, which has been far slower about jumping onto the agricultural bandwagon.

DuPont took a major step forward in growing its agricultural business in late July, when it completed its acquisition of an 80% stake in Pannar Seed, a South African seed company with key connections to markets on the African continent. Africa is a largely untapped market when it comes to enhancing crop yields, and products like DuPont's could help revolutionize farming there, representing not just a huge profit opportunity for the company but also making possible big gains in standards of living in Africa.

Competition is fierce in agriculture, but the companies involved also work together in certain cases. Early this year, DuPont and Monsanto resolved patent lawsuits by agreeing to cross-license some of their intellectual property related to agriculture. That's something Monsanto has also done with Dow Chemical, but it also shows how important it is to come up with new innovations in order to have something valuable to trade when patent infringement litigation arises.

DuPont's strong share-price gains reflect the heavy-lifting that it has already done in moving toward a stronger focus on agriculture. As long as the farming industry remains healthy, that move will likely pay dividends for DuPont shareholders. Yet even amid the long boom in agriculture, long-term investors have to remember that even farming is cyclical, and the next downturn could make DuPont's decision seem ill-advised in hindsight.

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Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On November 28, 2013, at 10:48 PM, funfundvierzig wrote:

    We respectfully demur.

    DuPont Chieftess, Ellen Kullman keeps thumping the tub, with a refrain,"Highter Growth, Higher Value". But how likely is that achievement...when, Ms. Kulllman is...

    * Stuck with the same inbred mediocre and unethical Management TEAM which has brought down DuPont to this level of falling apart in the first place in the 21st century? Imprelis, Tell Us!

    * Dumping no less than 20% of her revenues and 29% of her earnings represented by chemicals based on full year 2012?

    * Is left with the same mediocre hodgepodge of DuPont AG & NUT businesses as before, second-place and second-rate to Monsanto, Syngenta, Scotts MIRACLE-GRO, and Novozymes?

    * Still pumping DuPont Corn Cob "Gasoline", bad-mileage, engine-damaging ethanol, a ludicrous waste of resources?

    * Left with no new cash from the sale of chemicals (it will be spun off to DD shareholders), which have apparently repulsed would-be buyers confronted with the legacy of litigation and environmental liabilities and massive pension underfunding. No cash for reinvesting in those touted "higher growth" opportunities.

    * Still in her CEO executive suite, doing what her ex-über boss, Chad Holliday, taught her to do so proficiently, namely dramatically shrinking DuPont.

    DuPont in the year 2014 as we see it, sans chemicals: Lower Growth, Lower Value, with revenues and earnings plummeting.

    Merely the query of one individual retail investor...funfun..

  • Report this Comment On November 28, 2013, at 11:04 PM, funfundvierzig wrote:

    "Competition is fierce in agriculture, but the companies involved also work together in certain cases. Early this year, DuPont and Monsanto resolved patent lawsuits by agreeing to cross-license some of their intellectual property related to agriculture."

    Again, we demur. This patent license agreement was hardly a civil meeting of the minds over tea and scones. It came about as a consequence of the big patent infringement lawsuit in Missouri, after U. S. DIstrict Court Judge Richard Webber disclosed he had levied FRAUD sanctions against DuPont for knowingly defrauding not only the Court but the public and investors as well with respect to DuPont's seed business, and after the jury imposed a $1billion verdict against DuPont, which was likely to be substantially increased given the egregious fraudulent misconduct on the part of DuPont and its officials and agents.

    What ensued was a settlement between Monsanto and DuPont, compelling DuPont to pay hundreds of $millions to Monsanto in license fees in order to embed Pioneer's otherwise inferior seeds with Monsanto's superior patent-protected GM traits.

    This litigation borne, if not forced license outcome is "hardly something" Monsanto does as a matter of routine with say, Dow Chemical.

    ...funfun..

  • Report this Comment On November 30, 2013, at 7:51 AM, DickHamilton wrote:

    I look at the plots up top and see the obvious high correlation between the plots for disparate entities. This tells me there is not information here - no truth. Anything you have to say about why these returns are what they appear to be is entirely spurious.

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