In an earlier article here, I argued that DuPont (DD) was an attractive value play. Since then, the stock has appreciated by 10.8%, beating the Dow Jones by more than 480 bps. The company is currently rated a weak "buy" on the Street versus a "hold" for Solutia (SOA) and a near "strong buy" for Eastman Chemical (EMN).
From a multiples perspective, Eastman is the cheapest of the three. It trades at a respective 11.5x and 10.6x past and forward earnings with a dividend yield of 2%. Solutia and DuPont trade at a respective 12.9x and 14x past and forward earnings. DuPont may be the most expensive, but it is also the safest being that it is the second-largest chemical producer while having the lowest volatility and the highest dividend yield at 3.2%.
At the third-quarter earnings call, Solutia's CEO, Jeff Quinn, noted challenges to volumes:
In the third quarter, we continued to see improvements to revenue reflective of selling price increases implemented this year in the growth and premium products. The demand for our premium products remains strong in Advanced Interlayers, especially in our acoustic products, which were up 22% over a year ago for both architectural and automotive; and in our Saflex premium color options, which is up 14% year-over-year. In addition, we continued to see our Performance Films super premium vehicle automotive film exceed expectations. As we expected, overall volumes for the company were down modestly in the quarter, driven predominantly by continued inventory corrections in the Chinese tire market, lower solar sales, lower heat transfer business due to the timing of certain fills and the destocking in the electronic business in addition to loss volumes from the divestment of our Other Rubber Chemicals businesses.
The reason I am primarily reserved in Solutia is its overexposure to the solar industry. Management anticipates that global PV installation will rise by a CAGR of 20% through 2015, despite recent annual growth that was 400 bps lower. Moreover, the implication of EVA doubling market share to 20% - as management expects - is that it will lower margins by roughly 1,000 bps. This is so because Vistasolar will target EVA at 3% of module product costs for clients. In any event, management guided for 2012 EPS of $2 to $2.30 with volumes growth of around 5.2%. EVA pricing is anticipated to decline.
Consnesus estimates for Solutia's EPS forecast that it will grow by 10% to $2.20 in 2012 and then by 17.3% and 13.6% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $2.52, the rough intrinsic value of the stock is $32.76, implying 18.1% upside.
DuPont, on the other hand, has experienced surging volumes. During the the third quarter, the chemical manufacturer realized a double-digit growth rate in all segments with a volumes rise of 17% in Latin America. Stellar performance was also noted in Pioneer - transitioning the company more into a strong ag brand as it takes on Monsanto (MON). The yield advantage in corn has markedly improved, more than offsetting the yield advantage decline in soy. In addition, the Danisco acquisition will only further the company's rise in agriculture while also expanding margins. Roughly one-third of DuPont's business comes from emerging markets, which helps hedge against domestic stagnation.
Consensus estimates for DuPont's EPS forecast that it will grow by 8.7% to $4.27 in 2012 and then by 12.6% and 10.4% more in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $4.76, the rough intrinsic value of the stock is $61.88, implying 20% upside.