Is DuPont In For A Turnaround?

May.22.14 | About: E. I. (DD)


DuPont struggled in the first quarter due to an unusually cold winter in North America.

But DuPont saw positive trends in its diversified business that could help it perform better going forward.

DuPont is aggressively introducing new products and optimizing its portfolio for better gains.

DuPont is also attractively valued, which makes an investment in the stock even more enticing.

E. I. du Pont de Nemours and Company (NYSE:DD) didn't have a good time in the first quarter. DuPont missed earnings estimates, as it struggled due to an unusually cold winter in North America. Farmers delayed the purchase of seeds and chemicals for the spring planting season, thereby reducing demand for its agricultural products. However, DuPont's other businesses did well, although the company might face certain short-term headwinds.

According to the Wall Street Journal --

A cold, soggy start to spring-following a harsh winter-has kept many U.S. farmers from completing fieldwork before they sow crops such as corn, soybeans and wheat. U.S. corn growers had planted 3% of the nation's crop as of Sunday, half the pace of the previous five years, according to the U.S. Agriculture Department. Plantings were behind schedule in Iowa and Illinois, the largest U.S. producers of corn and soybeans by volume.

DuPont is expected to sell less of its genetically engineered corn seeds because U.S. farmers are cutting back on plantings of the grain this spring in favor of soybeans. The USDA estimated last month that U.S. planted corn acreage will decline 4% from last year to the lowest total in four years. Corn prices fell sharply last year after growers produced a record crop, while soybean prices have held up relatively well, making the crop more attractive to farmers.

Better times ahead

But investors shouldn't lose hope. DuPont looks well-positioned for the long run, and the company is seeing good demand in its other business segments. Also, as the effect of a harsh winter season diminishes, DuPont should be able to fire on all cylinders once again.

DuPont's agriculture segment should be driven by new product sales, higher volumes, improved plant utilization rates, good cost control, and productivity gains in the future. Also, healthy demand from automotive and industrial markets is proving to be a tailwind, while signs of recovery in the photovoltaic market in China could be another driver.

DuPont's strategic and operational priorities have helped it deliver strong operational performance. Its integrated customer-centric innovation teams, along with science resources are delivering new products. DuPont introduced 1,753 new products last year, including some cutting-edge ones, such as Optimum AcreMax technologies, Optimum AQUAmax hybrids, Rynaxypyr insecticides, and Solamet paste that contributed to its market share gains. Hence, an army of new products should provide strong momentum to DuPont's business going forward.

Optimizing the portfolio for better gains

In order to refine its portfolio, DuPont had acquired Danisco in 2011. Now, the company is making more moves to optimize the portfolio and deliver more value to shareholders. So, it completed the $5 billion divesture of its Performance Coatings business in last year February. In July 2013, it acquired the controlling interest in Pannar Seed in South Africa. Next, in October last year, it separated its $7-billion performance chemicals segment, and signed definitive agreements to sell glass laminating solutions and vinyls, a part of the packaging and industrial polymers business, in performance materials.

The future looks better

For 2014, DuPont sees positive momentum across its portfolio with improving market demand and successful execution of its value creation plan. Demand projections from the automotive and housing industries are positive, and provide a good platform for growth in its performance materials, safety & protection, industrial bioscience, and performance chemicals segments. Also, DuPont is seeing an improvement in its business in Europe, and expects sequential growth to continue as industrial production across Europe recovers from recession.

Moreover, GDP growth in the range of 7% to 8% is anticipated in China, which is expected to push improvements in key areas like photovoltaics and automotive. With global car builds projected to increase by about 4% this year, the automotive industry should continue to be a tailwind for DuPont.

The company remains focused on advancing its operational priorities of innovation, global reach, and strong execution paired with disciplined capital allocations. These priorities will enable DuPont to deliver increased value to shareholders while achieving its long-term growth targets. Its business will leverage the scientific capability to increase return on research and development while expanding its pipeline. It continues to strengthen its market penetration into developing markets and increase collaboration with fast-growing companies.

Fundamentals and conclusion

DuPont's fundamentals are also strong. The company has a trailing P/E ratio of 21, which is well below the industry average of almost 36. Looking ahead, the forward P/E ratio comes down to an even more attractive value of 14. Hence, even though the company might be facing some short-term problems, the long-term prospects appear to be strong. Also, for the next five years, its earnings are expected to grow at an annual rate of 8.18%, well ahead of the 4.56% rate clocked over the last five years. Hence, investors should look beyond the short-term weakness at DuPont, as the company looks like a good long-term investment.

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.