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Using the Value Line Page: DuPont October 15, 2010
DuPont (DD – Free Analyst Report) is very proud of its over 200-year history. In fact, the company has an in-depth section on its web page outlining its progress from humble beginnings some two centuries ago with E.I. du Pont and “powder” (a euphemism for explosives) up to the present day with products ranging from household brands Teflon and Kevlar, to its Cyrel brand in the flexographic printing systems space. In fact, the company is so diverse that the Business Description on the Value Line page simply states that “DuPont is engaged in science and technology in a range of disciplines…” (A free copy of the Value Line research report for DuPont can be found here for use with this article.)
Most investors probably don’t appreciate the depth and breadth of DuPont’s product lineup or its powerful research and development capabilities. Although research and development costs accounted for only 5.3% of 2009 sales, that sum translated into dollars is truly impressive at nearly $1.4 billion. (This number can be calculated by taking sales for 2009 from the Statistical Array and multiplying by 5.3%, which can be found in the Business Description.) There are very few companies that can claim to invest over a billion dollars in their research efforts.
This R&D expenditure isn’t particularly onerous for DuPont because of its size, capital position, cash assets, and broadly diversified product line. Indeed, with a market cap of $41.5 billion, the company is one of the largest of the large caps. Although debt makes up about 50% of its capital structure, it covers its interest payments more than 10 times over. (Both of these facts can be gleaned from the Capital Structure box on the left side of the company’s Value Line report.) With a current ratio of 2.3, the company clearly has plenty of financial flexibility (current ratio is a measure of a company’s ability to pay all of its near-term costs and is calculated by dividing current assets by current liabilities, which can both be found in the Current Position box, which is directly below the Capital Structure box). Moreover, as noted above, the company’s fortunes aren’t reliant on any one product, which is an important measure of its diversification.
The company’s impressive financial position is what underlies its top notch Financial Strength rating of A++, which can be found in the Ratings box at the bottom right of each Value Line report. Adding other factors, such as the company’s diverse product mix (sales by main business line are broken down at the end of the Analyst Comment) and long history of dividend payments (this can be reviewed in the historical portion of the Statistical Array), leads to the company’s top Rank for Safety, which can be found in the Ranks box at the top left of each Value Line report.
Looking a bit deeper at the numbers, DuPont’s Return on Total Capital and Return on Shareholder Equity percentages tell the story of a management team that is a good ward of capital. Return on Total Capital measures how much a company earns on all of the money it is given by stock and bond investors. DuPont’s historical numbers are respectable. What distinguishes the company is the difference between this statistic and Return on Shareholder Equity, which is the return earned on just the equity portion of a company’s capital structure. A Return on Shareholder Equity percentage that is above the Return on Total Capital rate suggests a management team that is making good use of its debt financing to enhance returns for shareholders. The disparity between these two numbers in DuPont’s case has historically been quite large. (These figures can be found in the historical portion of the Statistical Array.)
The company’s earnings rebound from the nadir of a fourth quarter loss in 2008 to strong first-half earnings in 2010, a progression that is clearly chronicled in the Quarterly Earnings Per Share box at the bottom left of the page, has helped to drive DuPont’s shares higher. Indeed, the stock has advanced from a low of $16 per share in early 2009 to a recent price of about $45 (annual highs and lows can be found at the top of the Graph of each Value Line report). The strong share advance, coupled with solid earnings, helps underpin the company’s Above Average Timeliness Rank of 2, which can be seen in the Ranks box. (Timeliness is a proprietary Value Line measure, which predicts likely relative stock performance versus other stocks in the Value Line universe over the next six to 12 months.)
Long-term performance is also expected to be good. Although the company is only expected to post, on average, mid-single digit sales growth over the next three to five years, its capable use of leverage should turn that into high single-digit earnings growth (sales and earnings growth rates can be found in the Annual Rates box on the left hand side of the Value Line page). Note, too, that these expectations are above the company’s trailing five- and ten-year results, which means the Value Line analyst sees opportunity ahead for the company—something that is clearly outlined in the Analyst Comment for DuPont.
This earnings advance translates into a target price range between $70 and $85, which can be seen in either the Projections box or visually at the far right of the Graph (the dotted lines represent the projected price range). Add a relatively large 3.6% dividend yield to the mix and total returns over the projected three to five years range from the mid- to high teens, as illustrated in the last column in the Projections box.
High expectations for both near-term and long-term corporate and share performance, and a hefty recent advance in the share price are positive, but bring into question valuation. Disappointment can easily be bought by paying too dear a price for a stock, regardless of the company’s prospects. On this front, DuPont doesn’t score quite as well, but neither does it score poorly. In fact, the current P/E, which can be found in the Top Label section of the page, is about in line with the market’s current P/E. Moreover, as can be seen in the historical section of the Statistical Array, it is about in the middle of the company’s historical range. The dividend yield, however, is toward the high-end of its historical range, a good sign on the valuation front. So, while the company can’t be called cheap at current levels, nor can it be called overvalued.
Looking at the plethora of information available on the Value Line page, it is clear that investors would do well to consider this financially-strong, widely-diversified science and technology company for its solid near-term and long-term prospects.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.