DuPont - Transformation Continues For This Diversified Conglomerate

| About: E. I. (DD)

Shares of DuPont (NYSE:DD) saw a modest uptick on Tuesday after the diversified agricultural and industrial company reported a solid third quarter earnings report.

DuPont is seeing solid operational performance despite severe currency headwinds and a poor performance of its chemicals business. After a solid momentum, shares are fairly valued at this point in time, nothing more, nothing less.

Third Quarter Results

DuPont generated third quarter revenues of $7.73 billion, up 5.4% on the year before. Revenues slightly missed consensus estimates of $7.77 billion.

The company reported net earnings of $285 million compared to profits of merely $5 million last year. Note that last year's earnings were impacted by $394 million in employee separation charges.

Diluted earnings came in at $0.28 per share, compared to a loss of $0.05 per share last year.

Operating earnings came in at $426 million, up from $405 million last year. Operating earnings totaled $0.43 per share, up two cents on the year before, thereby beating consensus estimates at $0.41 per share.

CEO and Chairman Ellen Kullman commented on the third quarter results, "We executed well against our plans. Third quarter sales volumes and operating earnings were stronger across most businesses compared to a soft quarter last year."

Looking Into The Results...

Sales growth was entirely driven by strong volumes, which were up by 9%. This was offset by a 3% drop in prices and a 1% unfavorable translation from foreign currencies. Growth was driven across all segments with exception of the performance chemicals business, which has been struggling.

Operating earnings of the segment fell from $413 million to $254 million. Earnings took a beating on lower prices for titanium dioxide, refrigerants and fluoropolymers, as well as higher inventory costs. Strength was furthermore seen across all geographic areas, but overall earnings fell from $921 million to $853 million.

The well-diversified operations resulted in quite some earnings stability for DuPont operating in agriculture, electronics, biosciences, nutrition, performance chemicals, performance materials and safety & protection.

As DuPont saved on taxes, corporate costs and interest costs, operating earnings actually increased by 5% to $426 million.

...And Ahead

For the full year DuPont continues to see operating earnings of $3.85 per share. Yet underlying assumptions have changed a bit.

Global GDP and industrial growth is seen a bit lower. DuPont also expects more currency headwinds offset by a lower tax rate of 22%.


DuPont ended its third quarter with $7.2 billion in cash, equivalents and marketable securities. Total debt stands at $15.0 billion, for a net debt position of around $7.8 billion.

Revenues for the first nine months of the year totaled $28.0 billion, up 1.8% on the year. Income from continuing operations after tax rose by 8.6% to $2.68 billion. Note that DuPont reported net earnings of $4.66 billion so far this year, driven by discontinued operations. At this pace annual revenues could come in around $36-37 billion, with operating earnings of around $3.5 billion.

Trading around $60 per share, the market values DuPont at $55.5 billion. This values assets of the firm at 1.5 times annual revenues and 15-16 times operating earnings.

DuPont currently pays a quarterly dividend of $0.45 per share, for an annual dividend yield of 3.0%.

Some Historical Perspective

With exception of a short time during the financial crisis, shares of DuPont have mostly traded in a $40-$60 trading range over the past decade. At the moment shares are trading at the high end of this range, still quite a bit removed from all time highs around $80 in 1998.

Note that shares started the year around $45 per share after which they have gained some 33%. Between 2009 and 2012, DuPont has increased its annual revenues by a cumulative 29% to $35.3 billion. Net earnings rose by some 60% to $2.8 billion.

Investment Thesis

So it seems that DuPont had a reasonably solid quarter despite the lackluster performance of its performance chemicals unit and severe currency headwinds, which combined are expected to create full year headwinds of $0.80 per share.

With so many activities being owned by DuPont, activist investors like Nelson Peltz, who is a co-founder of Trian Fund Management and has a stake in DuPont, is urging the company to divest underperforming assets.

DuPont is performing relatively well in high-margin businesses like agriculture, safety and electronics, moving away from underperforming industrial activities, notably commodity chemicals.

CEO Kullman already considered a spin-off or sale of its performance chemical unit. The unit with $7.2 billion in sales for 2012 performed poorly in the quarter, and is known for slow growth and volatile earnings. Kullman now noted that DuPont is moving with "urgency" to review the options for the unit and the impact on the overall business. This is after the unit reported a 38% decline in operating profits, despite a volume recovery.

The prospects for the fourth quarter look solid as well, driven by a solid expected performance for the agricultural business, which is expected to report a small quarterly profit in the fourth quarter. This would mark the first profitable fourth quarter in many years.

As such DuPont slowly continues to make progress in its business, transformations, moving into areas, which show steady solid growth and have less volatile earnings. In the meantime, the company continues to deliver on its $300 million cost savings plan for the year.

Back in December of last year, I last took a look at DuPont's prospects after the company provided a decent outlook for 2013. Shares were still struggling and lagging compared to the market on the back of high natural gas prices and a poor performance of the coating business. To offset this, DuPont restructured and made 1,500 jobs redundant.

DuPont also sold the performance coating business to the Carlyle Group (NASDAQ:CG) for $4.9 billion last year, thereby lowering pension obligations and allowing DuPont to improve margins and earnings stability. All of this should boost the value of the overall business.

At the time I concluded that the divestiture looks fine, and that the business was valued at fair multiples. I noted that investors looking for yield could pick up some shares, which yielded around 4% at the time. I didn't expect spectacular capital gains, but noted that investors could await nice dividend paychecks every quarter going forward.

Ever since shares have risen by around a third. Congratulations to those who have enjoyed the ride upwards, but I think shares are fairly valued at this point in time, and would remain on the sidelines. Long-term dividend investors could still hold some shares given the 3% dividend yield, prospects for further dividend hikes and modest share repurchases.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.