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Published: August 31, 2010
A sleeping giant has awakened.
One of the country's oldest companies has reinvented itself.
Once a stodgy old cyclical company, this Dow stock has used its
deep pockets and global brand to create a juggernaut of
earnings growth for the next decade.
In a lackluster economy, this company has tripled profits since
last year and projects average earnings growth of +20% through
2012. But it's still cheap. The stock sells for less than 13
times next year's earnings while also paying a solid 4%
yield, compared to a 2.1% yield for the S&P 500.
This company makes products for a wide range of megatrends such
as increasing worldwide demand for food, growing demand for
fossil fuel alternatives and the increasing advancement of
electronics and communications technologies. It also does
substantial and growing business in emerging markets.
But this isn't some fly-by-night company that's been getting
lucky. The stock is a blue chip Dow component that's been around
for more than 200 years.
EI DuPont de Nemours & Co. (NYSE: DD), or DuPont, calls
itself a science and technology company, but it's also one of
the largest chemical companies in the world. DuPont offers a
wide range of products from six separate business segments
including agriculture and nutrition, electronics and
communication, safety and protection, performance chemicals,
performance materials, performance coatings.
The company primarily makes products used to make other
products, such as chemicals used in LCD screens, fertilizer to
feed crops and chemicals used to weatherize and paint cars. The
company's trademark products are used in things we see everyday
including Teflon, Corian (for countertops and laboratories),
Kevlar (stronger-than-steel thread used in tires) and Tyvek (for
house wraps, medical packaging and labels).
The company operates in 80 countries on six contents and
generated $26 billion of revenue in 2009. Most of DuPont's sales
are generated outside the United States in the first half of
2010, including 19% in emerging markets, which have fast growing
economies and should grow in prominence in the future.
Why is it a good investment now?
Sales were up +26% in the second quarter, compared to the year
ago quarter, to $8.6 billion. Earnings nearly tripled in the
second quarter to $1.27 per share versus $0.46 last year.
All six business segments had double-digit sales increases, with
more than +25% volume growth in three of the segments.
Agriculture and nutrition (the largest segment accounting for
32% of 2009 sales) sales jumped +16% and pretax profits were up
+31% from the year ago quarter, primarily from the North
American seed business. This is particularly impressive
considering rival seed company Monsanto (NYSE: MON) saw
earnings drop -45% in the second quarter. The company said
several business earned revenues far in excess of pre-recession
levels.
How are they doing it?
As have most corporations in the past couple years, DuPont has
reduced costs, to the tune of about -18% in 2009. But the key to
growth has been in the company's research and development. The
company says it focuses on market-driven mega trends. In fact,
out of the $1.4 billion invested in R&D in 2009, 75% was
directed toward megatrends, including 50% toward increasing food
production and 15% for reducing dependency on fossil fuels.
This doesn't just sound good. It's working. Management says that
a surprising 30% of 2010 sales will come from products
introduced in just the last four years. Second quarter sales
increased in every major region but most of all in the fast
growing emerging markets. Year-to-date emerging market sales are
up +32% from last year and sales in emerging Asia are up a
whopping +58%.
DuPont pays quarterly dividends of $0.41 (since 2007), which
were uninterrupted by the recession. The $1.64 annual divided
translates to a solid yield of about 4% at current prices -- far
in excess of chemical majors Dow (NYSE: DOW) and
Ashland (NYSE: ASH).
In the second quarter, DuPont upped its 2010 earnings
projections from a previous $2.50-$2.70 per share to
$2.90-$3.05. The company also forecasts average earnings growth
of +20% per year through 2012.
Action to Take --> DuPont
has strong, well-diversified and relatively defensive earnings.
The company is on track to continue to grow earnings while
paying a yield far in excess of the market averages. The stock
represent a good value at current prices.
-- Tom Hutchinson
Staff Writer
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