DuPont (NYSE:DD) presently could be worth looking into as a quality play on products & chemicals used in growth industries ranging from agriculture to safety materials, and everything in between. Shares of DuPont I believe are worth looking into because of the underlying fundamentals, valuation, and technical's. I believe this will be the launching point for DuPont, as Thursday was an investor day for DuPont to highlight their plans. The CEO of DuPont highlighted that management is steering the company to focus on high growth areas like agriculture, advanced materials, and biotechnology. [PRNewswire] Because DuPont will be focusing their efforts towards high growth markets, I believe that focus will lead to share price growth.
[Data from Zacks.com]
Current Price: $53.37
Trailing 12 Month EPS: 3.59
Current PE ratio: 14.87
Expected Long-Term Earnings Growth: 8.36%
PEG Ratio: 1.67
Dividend Yield: 3.16%
Below is a chart from the Trefis page of DuPont that breaks down DuPont by its separate divisions and comes up with an estimate of what all its businesses are worth. The chart below shows that DuPont is diversified across many different sectors ranging from agriculture to electronics. The largest division of DuPont is Agro Science Products, which is engaged in the production of agriculture seeds, as well as chemicals that protect crops against weeds and bugs that harm crops. The second largest division of DuPont is Performance Chemicals, which manufactures chemicals for other industries; an example of a popular chemical that DuPont manufactures is Teflon®. DuPonts third largest division is its performance materials division, which manufactures chemicals that are used in packaging materials. The fourth largest division of Dupont is Safety and Protection Materials, which manufacturer's chemicals used in flame resistant materials, and probably the most famous DuPont product Kevlar®, which is for personal protection of law enforcement and military personal vests.
I will break down each of the top four divisions of DuPont to see if the underlying businesses are growing which in turn could lead to further share price growth for DuPont. The charts I use are from the division breakdowns from the Trefis Page of DuPont.
The Agro-Science division is the largest at DuPont and it has a strong growth trend expected in the future as well as a strong market share. As the first chart below shows, the global market for corn, soybean and other seeds is expected to grow from an estimated $39.3 billion this year to $51.6 billion in 2019, which is an increase in 31.30% in the size of the global seed market in a six-year period. The second chart below shows that DuPont has around 20% market share in the global seeds industry, therefore if DuPont can maintain or grow their market share, the increased global demand for seeds as shown by the first chart will lead to substantially higher revenues for the largest division of DuPont.
Performance Chemicals is the second largest division of DuPont and like its Agro-Science division, the performance chemicals division is expected to have strong growth in the next six years. A large portion of revenue for this division comes from TiO2 [Titanium Dioxide], and the global market is expected to expand substantially. The first chart below shows the size of the global Titanium Dioxide market, currently the market is $15.5 billion but the market is expected to expand to $24.6 billion in six years, which is a 58% increase in the size of the Titanium Dioxide market, and DuPont is positioned well for this expected increase. The second chart below shows DuPont that DuPont has a stable 21% market share in the Titanium Dioxide market, and is expected to grow slowly over the next six years. Even though some may say that DuPont is not growing market share, but the pie is expected to grow, so DuPont will still be getting the same piece, but from a much larger pie.
The third largest division of DuPont is performance materials, which includes engineering resins, and Ethylene Co-polymers. The performance materials like most DuPont products are in a wide variety of industries ranging from packaging to adhesives. The first chart below shows the revenues for the engineering resins segment are expected to grow from current levels $2.94 billion to $3.97 billion in six years, which is an increase of 35%. The second chart below shows the revenues from the Ethylene Co-polymer segment are expected to grow from $1.56 billion to $2.11 billion, which is a 35% increase. Even though the revenue numbers are not large, they are very meaningful for DuPont. Both segments of the performance materials division are expected to grow which will which lead to overall increases in revenue for the division and will make a difference in the earning of DuPont.
Safety & Protection Materials
Safety and protection materials are the four largest division of DuPont, but this division has the highest market share for the segment it operates. The first chart below shows that the market share in the global specialty fibers market is just over 40% and expected to slowly grow over the next six years. What makes this division special is that it has a highly recognized product Kevlar® that is famous for being manufactured for bulletproof vests. The second chart below shows the global specialty fibers market size, and like all the other divisions of DuPont I have highlighted, this one is the same with the market size expected to grow by 50% over the next six years. Therefore, with a large market share, and the expected growth in the size of the market DuPont is poised to see revenues from this division to continue to grow.
Using the data from the fundamentals section from above, I did a DCF [Discounted Cash Flow] model to estimate the fair value for the shares of DuPont. The DCF calculator I used is from Smartmoney.com, I inputted the data from the fundamentals section, and use the assumptions of the EPS growth would last for 5 years and level off to 1% for years after that. For my benchmark return I used the SPDR S&P 500 (NYSEARCA:SPY), I went to longrundata.com and set the start date to 10 years from today's date to find the annualized total return for the SPY, which was 7.79%, so that is what I used for my benchmark rate. Based on the DCF calculator the fair value of shares of DuPont is $73.06, which is 36.89% above current levels.
The technical picture of DuPont shows clear levels where DuPont could breakout, or breakdown. Over the last two years, DuPont has traded between $57 and $37, and is currently trending towards the top end of the range. Back in October 2012 DuPont fell hard after earnings and continued falling, but the stock retraced and filled the gap, then broke out above the level of $48.47, which the gap down occurred. The level around $48.47 is very important because of this, and because once DuPont broke out above this level is retested the level twice and held both times, so this is a strong level of support, and should be watched closely.
[Technical Data from ThinkorSwim chart software]
Based on the expected growth of each major division of DuPont, I expect revenues will continue rising even if there is a global slowdown. In addition, DuPont has a strong 3.16% dividend yield, which is in the top 10 highest dividend yields in the Dow Jones Industrial Average (NYSEARCA:DIA), and will continue to be sought by investors looking for yield. In addition, DuPont did not cut their dividend during the financial crisis, which speaks to the strength of the company even in times of recession. The DCF I ran clearly shows that DuPont is undervalued based on fundamentals, but technically DuPont is in no-mans land. If your investment timeframe is long-term meaning 3-10 years or longer, DuPont could be bought at these levels and put a DRIP on the shares. If your investment timeframe were shorter term, I would wait for one of two things to occur, either a breakout above the $57 level, or a re-test and hold of the $48.47 level.