Long-term investors enjoyed DuPont's 15-year stock price and earnings boom from 1983 to 1998. But they now have only their dividends for solace. The stock has returned to 1996 levels and recent earnings have fallen. Patience is required to see whether the company is either sorting out its strategy for future growth or failing as a poorly managed, '60s-style conglomerate.
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CEO Charles Holliday blamed the drop on an increase in raw materials prices and the weakness of the euro. But it could have been far worse: He said that the company's swift action successfully tackled $200 million of the estimated $250 million negative impact from the 45% rise in oil prices, 75% increase for natural gas, and 7% decline in the euro.
Promising synergies or failing conglomerate?
DuPont is struggling to position itself for future growth. It spun off its Conoco (NYSE: COC.A) oil business in 1998 and 1999, which may look foolish -- small "f" -- given the return of higher oil prices. Last year it purchased Pioneer Hi-Bred, the agricultural seed powerhouse, only to run headfirst into the controversy over genetically engineered food, which put a damper on DuPont's agricultural biotechnology life science efforts.
Of course, it's easy to look back and say they missed the oil price increase or made a bad purchase, but that's not really the point. Those are short-term considerations (alternative energy will replace oil eventually; engineered food in some form is inevitable). DuPont could be on track to achieve long-term synergies from complementary chemicals businesses. Or else it might just be a '60s-style conglomerate of unrelated businesses that will drag each other down if not spun off to leave DuPont's core competency.
But can anyone say today what DuPont's core is? It calls itself a "science company." Ahem. If "life sciences," why the joint effort for renewable polymers? If it's materials, why drugs?
Speaking of drugs, the company has had high hopes for its pharmaceuticals unit, though it toyed with a sale of that division. That seems to have faded with the recent FDA approval of Innohep for blood clots and the company's new application for FDA approval to co-market a new cholesterol drug, which has shown excellent phase III results in raising good cholesterol and lowering bad cholesterol levels. The drug business to me is clearest evidence that DuPont just might be a failing conglomerate.
OK, if DuPont doesn't have a core competency, it joins Eastman Kodak (NYSE: EK) and Xerox (NYSE: XRX). If it's a conglomerate, there's trouble.
A '60s conglomerate -- without Jack Welch
Of course, everyone loves a conglomerate when it's well-managed and making lots of dough. The idea is that, even if the businesses are unrelated, profits from one offset weakness in others. I'm hardly the first person to say that General Electric (NYSE: GE) is just another conglomerate with a fantastic string of good years due to CEO Jack Welch's management. But it, too, will eventually feel the effects of diversification. (By the way, here's a fascinating take on how GE keeps those great earnings numbers coming.)
Here's the conglomerate test: Can you identify GE's core competency -- other than to employ Jack Welch? "Bringing good things to life" is a catchy ad, but it isn't a business. Bottom line: DuPont management is not Jack Welch, and DuPont's balance sheet -- with second-quarter long-term debt over four times cash -- can't compare.
Your Turn:
Is DuPont a company whose synergies will show, or is it a conglomerate without a Jack Welch to make it work? Sound off on the DuPont discussion board!
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