DuPont Shifting Focus To High-Growth Segments

| About: DowDuPont Inc. (DWDP)
This article is now exclusive for PRO subscribers.

E. I. du Pont de Nemours (DD) with a long-term aim of improving its financial performance, plans to divest its low-growth segments. Through these divestitures the company expects to enhance shareholder value and focus on higher-growth and high-margin businesses. At the beginning of 2013, DuPont sold its performance-coating segment to equity firm The Carlyle Group (NASDAQ:CG) for $4.9 billion and used $1 billion for share buybacks and reduction of its debt burden.

In the last quarter of 2013, to further boost shareholder value the company announced a spin-off of its performance-chemical segment, which contributes around 20% of the company's revenue. This segment makes titanium dioxide, or TiO2, which is used in paint pigments, refrigerants, and Teflon. The year-over-year operating profit from this segment declined 51.25% to $769 million in the first nine months of 2013. The spin-off is expected to be completed in the second quarter of next year. DuPont faced a slowdown in demand for TiO2, and the low growth and volatile earnings of this segment doesn't fit with the company's long-term growth strategies. The cost related to this transaction -- $0.01 to $0.02 per share -- is negligible and will not affect earnings significantly.

DuPont is also divesting part of its performance-material segment to Kuraray (OTCPK:KURRY) for $543 million. The transaction is expected to be completed by the first half of this year. This segment contributes around one-fifth of the company's total net sales. DuPont under this agreement will sell its glass laminating solutions/vinyl, or GLS/Vinyls, business, which generated revenue of more than $500 million, or around 7.8%, of the performance-material segment's 2012 revenue. This unit supply products used for automotive and industrial purposes. Further, the transaction valued GLS/Vinyls unit on a price-to-sales, or PS, multiple of around 1.09 times, whereas DuPont's overall PS is around 1.66 times, indicating the unit's low margins or lower growth potential compared to the company's other segments. These transactions reflect DuPont's strategy to reduce its emphasis on low-margin businesses and shift its focus to high-growth segments, such as agriculture and nutrition, bio-based industrials, and advanced materials to strengthen its market presence.

Moreover, the GLS/Vinyls transaction is expected to increase the prices of vinyl acetate monomer, or VAM, which is $930 to $1,030 per ton, as Kuraray may use most of the production from DuPont's GLS/Vinyls business for its internal use. This transaction will enable Kuraray to meet its demand for polyvinyl alcohol, or PVA, which is supplied by this unit. Revenue from Kuraray's vinyl-acetate segment in the second quarter of the fiscal year ending in March 2014 grew by 19.9%, year-over-year, to $900.5 million, with operating profit of $245.27 million. It is expected that this acquisition will reduce Kuraray's dependency on the VAM suppliers and deepen its presence in the U.S., Europe, and Asia. Additionally, the company plans to expand its water-soluble PVA facilities in the U.S. to fulfill demand for detergent applications. This acquisition may help the company to achieve its expansion plans in the U.S. comfortably. With this deal Kuraray is in a better position to enhance revenue from the vinyls-acetate segment at higher margins in the coming quarters.

DuPont to focus on high-growth segments

DuPont's agriculture business for the first nine months of 2013 reported year-over-year revenue growth of more than 21% to $2.24 billion. This growth was due to higher corn-seeds and crop-protection sales, aided by its controlling interest in Pannar Seed. The company witnessed a healthy demand for its corn hybrid seeds and expects this strong growth in crop protection to continue next quarter, as the company is aggressively expanding its presence by launching a series of new products. To enhance its growth opportunities, DuPont has also collaborated with Deere & Co. (NYSE:DE) through its subsidiary DuPont Pioneer.

This will provide an opportunity for DuPont to merge its Field360 software with Deere's Wireless Data Transfer software, helping farmers enhance productivity. DuPont Pioneer and Deere are expected to offer this service in 2014. This will allow DuPont to provide better solutions to farmers regarding seed variety, planting, and harvesting. This deal should also enable DuPont to monetize the huge opportunities available with it, as the company through its Field360 product offered seeding prescriptions to only 1.5 million acres, or 7.5%, of its total mapped area, which was around 20 million acres in 2012. The company charges $500 per farm for this service and plans to raise the subscription fee for this upgraded service next year. This means if DuPont can provide the seeding prescriptions to the remaining 92.5% of the total mapped area, it can significantly increase its top line.

This deal will help DuPont to compete with Monsanto (NYSE:MON), which acquired Climate Corporation to enhance its data science capabilities. Monsanto will leverage Climate Corporation's Climate Pro product, an advanced technology that provides information regarding weather conditions to farmers. This will enable farmers to limit crop-production loss due to bad weather and improve farm yield. With Climate Pro, farmers can enhance corn production by 30 to 50 bushels per acre. This will boost farmers' per-acre average profit by $100 for corn and $50 for soybeans. Further, the company will also combine Climate Pro with its precision planting services to expand its integrated farming systems, or IFS. For Climate Pro offerings the company will charge a fee of $15 per acre for corn fields and $7.5 per acre for soybean fields, and the merged service will be offered at a subscription fee of $25 per acre for corn fields and $17.5 per acre for Soybean fields. IFS also has an addressable market opportunity of around 400 million acres for corn, soybeans, and cotton, and by combining its products Monsanto will boost future earnings and enhance farm productivity.


DuPont is shifting its focus to high-growth businesses by divesting and spinning off low margin segments to enhance its growth prospects. Moreover, its collaboration with Deere will boost farm productivity and farm earnings, helping it to gain farmers' confidence in its services. This will in turn enhance its earning capabilities and strengthen its financial position. The company's strategy to enhance shareholder value by divesting its low-margin businesses will continue to maintain investor interest. I expect, with the company's strong growth prospects, investors will add this stock to their portfolio, with a long-term view.

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.