Despite a Weak Quarter, DuPont Appears to Be Headed for Higher Ground

It was just a few weeks ago that E. I. DuPont (NYSE: DD  ) , which has experienced its share of ups and downs, announced that its results for the second quarter would slip below the $1.28 per share it earned a year earlier. Coincidentally, that announcement followed by just a day news of a strong third quarter at Monsanto (NYSE: MON  ) , the company that a restructuring DuPont is clearly seeking to emulate.

The primary question now becomes whether DuPont should be quarantined from Foolish portfolios, or constitutes a sensible long-term holding. The first thing to know in responding to that query is that the primary culprit for the disappointing quarter involves lower-than-expect corn seed sales, which the company called a "short-term trend."

Source: Wikipedia.

Also having an impact, probably to no one's surprise, will be soft results from the performance chemicals unit, which is headed for a 2015 spinoff. On those bases, it's probable that a return of upward momentum isn't beyond the realm of possibility for the venerable company, which was formed as an explosives manufacturer way back in the Jefferson Administration.

Company reconstruction
You likely realize that DuPont is undergoing a major restructuring, moving from its longtime chemicals concentration to a greater weighting in agricultural, food products, and industrial biosciences. Last year, to make room and capital for that directional change, it sold its automotive paint unit for $5 billion and announced an agreement to sell a portion of its performance materials segment. As noted, it's also preparing to shed its erratic performance chemicals operation through a spinoff to DuPont shareholders.

As CEO Ellen Kullman pointed out at a Stanford Bernstein conference about a month ago, acquisitions during the same approximate period have included Danisco, a Danish producer of enzymes and specialty foods. In addition, about a year ago, DuPont bought a majority stake in Pannar Seed, the biggest seed producer on the African continent.

Agriculture's increasing share
For 2013, while Monsanto derived essentially all its revenues from agriculture-related products, DuPont's agriculture and biosciences sales accounted for a pro forma 57% of its total. As I've noted in the past, it appears likely that the group's contribution could reach 70% or more by 2016. In that connection, Kullman said at the Bernstein gathering that, "Market demand in this area is driven by both population growth and economic development, creating a myriad of needs and requirements among our customers."

For now, DuPont resembles an HGTV house in the throes of a serious renovation. Nevertheless, there are a couple of disparate ways to judge the company. Some are convinced that Kullman's promises have far outstripped DuPont's performance. Others, however, anticipate increasing valuations as the restructuring progresses. The corn problems that manifested themselves in the second quarter are likely temporary, and the company will clearly benefit from jettisoning its volatile performance chemicals segment.

A look at the numbers
While there's a bevy of legitimate question marks concerning DuPont's structure and composition, say, three years hence, it's enlightening for investors to examine some of the company's key current metrics. Let's compare a few of its numbers and ratios with those of Monsanto. And for added perspective, I'm inclined to include comparable metrics from Syngenta (NYSE: SYT  ) . While smaller than either DuPont or Monsanto, Basel, Switzerland-based Syngenta also produces herbicides, pesticides, seeds, and plants.

Metric

DuPont

Monsanto

Syngenta

Market Cap

$60.2B

$65.4B

$34.1B

Trailing P/E

20.9

24.7

20.9

Operating Margin

12.3%

25.6%

15.4%

Return on Equity

20.3%

18.5%

18%

Total Debt to Equity

68.8

21.6

33.7

Forward Annual Yield

2.60%

1.40%

N/A

Sources: Yahoo! Finance and TMF calculations.

As is clear, DuPont is of a similar size to Monsanto, with both topping Syngenta. Monsanto surpasses the others in the all-important P/E metric, and also leads handily from a margin perspective. While the returns on equity for all three are similar, DuPont produces the highest forward dividend yield. (From a trailing perspective, however, DuPont and Sygenta are about equal.)

The Foolish bottom line
Quarterly hiccup or not, then, I'm inclined to keep close tabs on DuPont. Once performance chemicals has been dispatched, the company's margins are likely to escalate meaningfully, which, in turn, will produce a salutary effect on its valuations. Having said that, I'd continue to reserve DuPont for investors with patience and longer-than-usual investment time horizons.

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Comments from our Foolish Readers

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 July 07, 2014, at 2:38 PM, funfundvierzig wrote:

    We are afraid Ms. Kullman is making the DuPont conglomerate an extension of her kitchen with corn and beans and food ingredients and that awful-tasting soy stuff. Unfortunately for DD shareholders when she dumps her chemicals next year 2015, Teflon, TIO2, acids, refrigerants, and other fluorochemicals, she will be tossing out $7 billion a year in revenues or 20% of total DuPont revenues of some $36 billion. Out goes a very substantial cash flow and contribution to DuPont's obese overhead, and the likelihood of maintaining the dividend as its quarterly rate of 45 cents.

    …funfun..

  • Report this Comment On July 07, 2014, at 2:48 PM, funfundvierzig wrote:

    DuPont's dissimulating Management and their PR tricksters with much hype and hokum have been touting DuPont as the "leading" (their word) world-class enterprise in agriculture and nutrition for some time.

    Commercial reality is strikingly different and points that DuPont is headed for lower ground. DuPont is...

    * Way behind Novozymes in sales of enzymes and food additives,

    * Way behind Monsanto in sales and innovation in seeds,

    * Way behind Scotts MIRACLE-GRO in retail lawn and garden products,

    * Way behind Syngenta, Bayer, BASF, Dow Chemical and Monsanto in the sales of ag chemicals/crop protection.

    Investing in the shares of this increasing muddled and mismanaged conglomerate, shrunken and shrinking, is risky at these price levels.

    Merely our individual opinion...funfun..

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