DuPont (DD - Free DuPont Stock Report) is a diversified chemicals manufacturer that serves a broad spectrum of industries from agriculture to electronics, with an emphasis on science and technology. For over two centuries, the company has been at the forefront of chemical innovation and discovery. Moreover, its enormous global footprint (one of the top 5 largest chemical companies in the world by both market capitalization and revenue with operations in more than 90 countries) makes it an economic bellwether and market mover. Thus, it comes as no surprise that the company is ranked atop Fortune Magazine’s list of the “World’s Most Admired Chemical Companies” (March, 2012). This review will take a closer look at some of the company’s recent troubles, its more attractive attributes, and how the current climate may provide an opportunity to initiate or shore up a position in a solid investment vehicle, poised for firm gains over the long term.
Just a few days ago, DuPont’s earnings shortfall, along with similarly disappointing results from a few other Dow components, contributed to a broader market skid that was indicative of the tough global economic conditions that have softened demand in many of its markets. Analyst Michael Napoli notes in his most recent supplementary report that “weakness may persist in the near term” and that “macroeconomic challenges in Europe, elevated unemployment on the domestic front, and a potential slowdown in emerging markets could all hurt results in the year ahead.”
In fact, considering that sales in the recently ended September quarter came in at $7.4 billion, down from $9.2 billion a year ago, a look at the Quarterly Revenue Box reveals that this would be the first negative year-to-year revenue comparison in over 10 quarters. In addition, while the Quarterly Earnings Box indicates that the second half of the year tends to be seasonally weak profit-wise, the 36% year-over-year drop in third-quarter share net (to $0.44 a share) is the steepest decline the company has endured since the end of the last recession.
Taking these factors into account and scanning up to the Graph where the price chart lives, one can plot a period of steady gains from around the middle of 2009 until the back half of 2011, when the stock price then appeared to waver and began to head south. This could correlate with the 30% year-to-year decline in share net during the fourth quarter of last year. Stepping back into the present, DuPont’s recent earnings miss helped to push the stock down to $44.71, its lowest quote since last December, only $1.65 shy of its 52-week low.
This leads us to our rationale for keeping a close eye on this equity. Despite the unfavorable results and the subsequent price dip, the Timeliness rank remains a 3 (Average), which suggests that investors can expect the price to be tethered to the broader market’s mean in the year ahead. Although it is still too early to tell the extent to which the slowdown in performance will negatively impact the stock price, management has lowered its 2012 guidance. In all likelihood, these softer expectations have already been discounted by the market. Moreover, the company intends to implement substantial cost-savings initiatives, including operational improvements, labor cuts, and the late summer announcement of the sale of its performance coatings business to private-equity big, The Carlyle Group, for roughly $4.9 billion. These measures are in line with DuPont’s streamlining efforts, which focus on identifying its most profitable assets, while maintaining a diversified portfolio. Indeed, the Analyst’s Commentary supports this notion when Mr. Napoli stated that, “This move reflects the company’s strategy of pursuing competitive advantages in high-margin businesses with strong growth potential.” That said, we believe that management’s scalpel, rather than an ax-wielding approach to cost restructuring, points to its confidence in the fortitude of DuPont’s remaining operating segments and their respective growth potential.
Moreover, turning attention to the Statistical Array and the Annual Rates Box, assuming that Mr. Napoli’s projections are close to the mark, it is worth noting that DuPont’s sales, cash flow, and earnings growth rates, as well as return on shareholder’s equity, are all expected to be strong over the 3- to 5-year horizon. Meanwhile, the rising dividend payout should appeal to the income-seeking investor. Furthermore, while the Capital Structure Box indicates that the company is moderately leveraged, the Financial Strength rating is an A++, the highest grade Value Line issues.
All told, we believe that investors should watch DD shares keenly over the next several weeks for an opportune entry point. Although the Projections Box suggests that the stock’s total return potential is handsome over the long haul, the lackluster global economic environment may weigh on the share price in the near term.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.