Is DuPont Heading In The Right Direction?

| About: DowDuPont Inc. (DWDP)
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Summary

The agricultural chemical industry is growing rapidly with the growth in the economic situation.

DuPont is in a strong position to capitalize on the growing demand.

DuPont’s cash-generating potential is not strong.

Global economic and chemical demand has been growing over the years, and the growth should continue to speed up in 2014. Based on a report by the American Chemistry Council, with the progress in the economy, growth for chemicals and agricultural products will improve globally to 3.8% in 2014. The strongest growth will mainly come from the developing nations of the Middle East, Asia and Latin America.

However, Western Europe and Japan should recover modestly. Looking at the economic circumstances and the increasing demand for chemical and agricultural products, in this article, I picked E.I. du Pont de Nemours and Co. (DD), which is generating strong growth and is setting strong footprints for future growth: I looked at its business strategy, financial positions, and future prospects to gauge where it stands. I will also try to look at its ability to sustain returns.

Where Does DuPont Stand?

Business Strategy

E.I. du Pont de Nemours and Co. is a research and development and an engineering company that offers product and patent applications for nutrition, agriculture, electronics and communications, home and construction, safety and protection, and transportation and apparel. DuPont is a well-diversified company with a strong business model. Aside from its agricultural business, it is in a position to capture demand for its industrial business.

Based on its strategy, DuPont is further looking to expand its science-driven business of the agriculture and food value chain. The company's agricultural business nearly accounts for 40% of overall sales. Most of the demand is coming out of North America mainly from Middle East, China, India, Europe and Latin America. DuPont has extensive global footprints. It wants to provide sustainable science-based solutions for its customers in these markets. It is strong in investing in research and development to introduce innovative seed-applied technologies, elite genetics, and biotech and native traits.

With the recent product successes of Optimum, AcreMax, corn products and Optimum AQUAmax corn hybrids, cyazypyr, rynaxypyr, and new fungicide products, the company is set to grow in the coming days with new seed treatments under the Lumigen™ Seed Sense brand. The company has also launched EncircaSM services to improve productivity and success of grower operations, which should add around $500 million to the company's sales.

DuPont is also keeping its focus on advanced industrial materials. The company is steadily looking to grow industrial production to keep driving demand for its products. Finally, it plans to build new bio-based businesses by combining advanced materials along with agriculture and nutrition businesses. Thus, the company is spinning off its performance chemical segment in 2015 to a separate company. This spin off helps it focus more on its high-valued core business and further improves operational efficiencies and earnings.

Ability to Sustain Returns

DuPont's business strategy appears to be working for the company. Its increased focus on the agricultural and nutrition business, global industrial production and separating its low-performing chemical business are creating a strong foothold for future growth. Consequently, it is expecting double-digit growth in earnings in 2014. Recently, DuPont announced first quarter results. The result shows that its strategy is on the right path. The company has generated substantial margin and earnings improvements in electronics and communications, safety and protection, industrial biosciences, and in its nutrition and health business.

Amount in millions

Q1 2014

Q1 2013

Percent of change

Agriculture

$1,442

$1,516

-5

Electronics & Communications

$75

$49

53

Industrial Biosciences

$56

$41

37

Nutrition & Health

$93

$76

22

Performance Chemicals

$200

$251

(20)

Performance Materials

$299

$292

2

Safety & Protection

$175

$138

27

Other

($92)

($87)

Total segment operating earnings

$2,248

$2,276

-1

Operating earnings per share

$1.58

$1.56

1

Source: Company Fillings

The table above demonstrates the trend that the company is working on the right business strategy. The company has experienced a seasonal decline in its agricultural business. Overall, its all-business segments are on track to generate steady growth except in its performance chemical business, which the company is preparing to spin off. The chemical business is putting pressure on the top and bottom line growth. However, its cash flows are not presenting a rosy picture. Over the past three years, its operating cash flows are on a downward trend because of the chemical business and changes in agriculture working capital. Consequently, its free cash flows are not covering dividend payments. In 2013, its free cash flows were standing at $1.3 billion, and dividend payments were at $1.6 billion. Its cash and cash equivalents went down to $3.5 billion in the Q1 of 2014 compared to the past year quarter of $6.5 billion. Thus, its dividend growth remains low at only 10% in the past five years. I'm not expecting any substantial increase in dividends this year. Amid this, the company's buyback programs will strengthen earnings per share and dividends in the coming days.

In Conclusion

DuPont is working on the right strategy, and that has been working for the company. Its increased focus on its agricultural and industrial business should lead it to make decent profits this year. Its plan of spinning off its chemical business will allow it to focus more on its core business and should reduce the extra burden on earnings. However, I'm not expecting any dividend increase from the company, as it is struggling to generate hefty cash flows.

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.