After ranking among the worst performers in the Dow Jones Industrials in 2012, DuPont (NYSE: DD ) shares staged a solid comeback this year, returning a market-beating 47% year to date.
That also makes DuPont one of the best industry performers for 2013, hugely outperforming arch rival Monsanto's (NYSE: MON ) 23% returns and second only to Huntsman Chemical's (NYSE: HUN ) whopping 56% gains so far. Peer Dow Chemical (NYSE: DOW ) is trying to play catch up, having jumped 15% this month alone, but the stock is still closing the year a notch below DuPont with 41% returns.
So, did DuPont deliver solid growth on its top and bottom lines this year that peers couldn't match up? Not quite. In fact, the company is set to close the financial year on a dour note. Investors are simply optimistic about DuPont's prospects, backed by some major business decisions that it took in 2013.
DuPont's truce with Monsanto over a long-pending legal battle, and its decision to divest its core titanium dioxide pigment (TiO2) business soon after Huntsman Chemical made a similar announcement were the most notable developments. Encouraged by those business decisions, analysts expect DuPont's earnings to grow 13% in 2014. But will the company's moves really pay off and boost share prices in 2014, or have investors jumped the gun? Let's find out.
The big opportunity
DuPont's agriculture business was the strongest this year, contributing 35% and 48% to its total sales and operating income for the nine months ended Sept. 30, 2013. Seed sales grew 11% during the period, helping DuPont gain more than a percentage point share in the critical U.S. corn market. This year DuPont also acquired majority stake in one of South Africa's leading seed companies, Pannar Seed, thereby expanding its global presence.
But the most significant development of 2013 was the cross-licensing agreement that DuPont struck with Monsanto. In return for an annual royalty totaling $802 million to be paid for four years beginning 2014, and another annual payment of $950 million starting 2018, DuPont will be able to offer Monsanto's soybeans trait, including the popular Genuity Roundup Ready 2 Yield soybeans, from next year. While the financial implication is big, access to the world's largest seed company's technologies certainly has its advantages. The deal has come at an opportune time. With a record corn harvest this year sending corn prices to multiyear low, farmers in the U.S. gear up to plant more soybeans in 2014.
Backed by these additional opportunities, DuPont's agriculture business should continue to perform well next year. Meanwhile, if the TiO2 markets revive, DuPont's 2014 performance graph could end up looking way better than this year's.
Will this idea work?
Improving sales volumes in recent months signal a reviving Tio2 market. TiO2 was a high-margin product until late 2012 when a supply glut sent pigment prices tumbling. After a long lull, both DuPont and Huntsman Chemical reported 25% and 20% higher year-over-year TiO2 sales volumes, respectively, during their third quarter. That's encouraging news for DuPont going into 2014.
But all eyes will be on the progress of DuPont's planned TiO2 segment spin-off. The business, which generated $7.2 billion in revenue in 2012 and contributed 21% to the company's total revenue, will be spun off into a separate public company. Given the volatile and unpredictable nature of the TiO2 markets, DuPont expects the separation to unlock greater value for its shareholders. With industry experts remaining less hopeful about the TiO2 business over the long run, and Huntsman also opting to separate its pigment division, DuPont could be headed the right way.
At the same time, DuPont is well established as the world's largest TiO2 producer, while it still has a long way to go in the field of agriculture. Competition from Monsanto is intense, and there's the threat of getting mired in controversies over genetically modified organism foods. So separating the TiO2 business doesn't mean that it'll be a smooth ride from here. With DuPont planning to complete the transaction within the next 18 months, investors should expect significant progress and regular updates in 2014.
DuPont's electronics and communications division should also improve in 2014. Revenue from the business fell 8% through September this year even as Dow Chemical reported 2% improvement in sales from its electronics and functional materials business during the period. While dominance in the smartphone and tablet material market is boosting Dow Chemical's revenue, DuPont's focus on photovoltaic and solar materials hasn't helped much. But with China planning to install 12 gigawatts of PV power next year, DuPont's prospects look better.
With growth catalysts in place, DuPont should perform well in 2014. And if the company can capitalize on the Monsanto soybean opportunity, and completes the TiO2 transaction ahead of schedule, the stock could head even higher. DuPont investors can look forward to an eventful and profitable 2014.
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