This Dow Stock has as Much as 80% Upside

By the end of 2011, the world’s population should reach 7 billion. Through 2050, it is estimated to grow by 150,000 people daily and reach 9 billion. As a result, there will be billions more mouths to feed. It will also be even more crucial than ever to lessen the world’s heavy reliance on fossil fuels. There will also be other needs to protect the environment and ensure the world can support the population.

These are just a few of the “Megatrends” that Dow component EI DuPont de Nemours & Co. (NYSE: DD) feels uniquely positioned to work to its advantage. Known more simply as DuPont, a subset of these megatrends is growth in developing markets. These emerging economies will experience the lion’s share of population growth and have significant room to clean up their environments. DuPont’s ambitions in these trends have the potential to benefit its shareholders immensely.

DuPont has perhaps one of the greatest opportunities to benefit from more efficient food production and cleaner alternative energies. These themes are playing out right now, with DuPont fast at work to beef up its capabilities in both industries. In January, DuPont announced it was acquiring Danisco, a Danish maker of specialized food ingredients and enzymes used to produce foods and energy, particularly biofuels. The deal closed in May for $5.8 billion, with Danisco folded into DuPont’s Nutrition, Health, and BioScience businesses. Danisco recently had a market capitalization of $49 billion, which means Danisco now represents more than 10% of its total operation.

More recently, DuPont announced on July 25 that it bought solar materials maker Innovalight. Innovalight was a privately-held firm and the purchase price wasn’t disclosed, but DuPont has ambitions to double the size of its solar operations to $2 billion in sales by 2014. The solar market holds great promise, as governments around the world work to reduce their energy dependencies on oil, coal and nuclear power production.

The recent merger and acquisition activity should give you a good feel for the businesses DuPont intends to target for rapid expansion. Acquisitions will enhance overall revenue growth and add to respectable internal growth.

DuPont operates seven primary divisions, the largest of which is the agriculture and nutrition unit, which made up nearly 29% of last year’s $31.5 billion in sales. The company has seven business segments: Agriculture & Nutrition, Electronics & Communications, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection and Pharmaceuticals. Specific industrial uses include chemicals that go into making pulp and paper, treating water, and as part of the automotive manufacturing process.

Overall, DuPont has an ambitious goal to grow earnings per share by a 12% annual rate through 2015. This will stem from continued growth at its existing businesses, through acquisitions and by cost-cutting. The company expects future sales growth of around 10%, which means management will continue to wring out costs from the rivals it buys and implement other fixed cost and working capital efficiencies. In this last category, DuPont announced goals for $300 million in savings during 2011.

DuPont’s moves are showing through in its financials. Last year, the company generated $3.1 billion in free cash flow, or about $3.30 per diluted share. This was used to buy back stock, pay down debt and paying $1.5 billion in dividends to shareholders.

Action to Take –> DuPont’s current dividend yield is 3% and should appeal to income-oriented investors and has a good chance of growing along with the company. DuPont’s growth ambitions will obviously appeal to more growth-oriented investors. Combined, investing in DuPont offers a solid combination of income and growth potential.

In the next five years, I estimate total annual returns of about 15% for DuPont shareholders. This stems from adding the 3% dividend yield to the 12% earnings growth, the last of which should translate into gains in the stock over time. With a forward price-to-earnings (P/E) ratio of 13.6, there is some room for valuation expansion. DuPont shares traded at an average P/E closer to 15 prior to the financial crisis.

Annual earnings growth and slight multiple expansion could contribute to a share price increase of 65%, close to $86 per share. Combined with the annual dividend payment, total returns could reach 80% by 2016. And if DuPont consistently delivers on its growth ambitions, there is the potential for the earnings multiple to expand even further.

– Ryan FuhrmannSource: StreetAuthority

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