E.I. du Pont de Nemours and Company (DD) is a company in transformation. The company remains focused on agriculture, nutrition, industrial biosciences, and advanced materials while it spins off its performance chemicals division in mid-2015. DD is gradually changing its focus to high-growth, less cyclical businesses.
DD has been retiring debt, raising its dividend, and repurchasing millions of shares of late. Any other substantial use of the company's cash is likely for mergers and acquisitions. Mergers and acquisitions, however, will likely take place after mid-2015, while the company focuses on its cost-cutting program and performance chemicals spin-off.
FMC Corporation (NYSE:FMC) is also a company in transition. Its products range from pesticides to biolpolymers. FMC had previously announced plans to split into two public companies. Yet, when it announced it had entered into an agreement to acquire a multinational crop protection company, FMC modified its previously announced plans to split into two companies. FMC indicated instead that it would pursue a sale of its alkali chemicals business by mid-2015, and retain the lithium business as a separate operating division.
FMC's shares have been hit hard, as agricultural markets have been affected by a variety of factors around the world, while sluggish demand for the company's nutritional products in certain applications has affected some parts of its health and nutrition business. Much of the FMC's remaining businesses, however, will be exposed to larger, favorable secular growth trends in agriculture; lithium, used in electronic vehicles; and an aging population that favors FMC's health and nutrition products. Given these favorable trends, with DD remaining focused on agriculture, nutrition, industrial biosciences, and advanced materials, FMC appears to be an attractive takeover candidate - once FMC completes its near-term transformation.
DD has made several major changes to the company in recent years, including expanding its life sciences businesses. Sales outside the U.S. and Canada accounted for 59 percent of total sales in 2013. The company's agricultural division (32.9 percent of sales from continuing operations in 2013, and $2.5 billion of operating profit) includes the world's largest seed company and a major supplier of crop protection chemicals. The company's nutrition and health division (9.7 percent of sales, $299 million operating profit) includes a soy protein business and microbial diagnostic testing products, and the food ingredients business. The company's industrial biosciences division (3.4 percent, $169 million operating profit) manufactures a wide range of enzymes. The company's electronic and communication technologies division (7.1 percent of sales, $334 million operating profit) includes electronic, advanced display and photovoltaic materials and products. The company's performance chemicals division (18.8 percent of sales, $1.0 billion operating profit) is the world's largest maker of titanium dioxide pigments used in coatings and paper, a leading producer of fluorochemicals and fluoropolymers, and makes specialty and intermediate chemicals. The performance materials division (18.1 percent of sales, $1.3 billion operating profit) includes engineering polymers and elastomers for auto, electrical, consumer and industrial uses. The safety and protection division (10.9 percent, $690 million operating profit) consists of Kevlar and Nomex aramid fibers and Tyvek and Sontara nonwovens for industrial, construction, packaging, automotive, military, and personal safety uses. The other division ($377 million operating loss) includes certain embryonic businesses not included in the reportable divisions.
Q3 2014 Earnings
In October 2014, DD announced increased profits on strong earnings across its nutrition and health and safety and protection divisions, offsetting continued weakness in their core agriculture business. The company realized higher margins in five of their divisions in the quarter, due to cost improvement initiatives. Adjusted earnings (excluding one-time items including charges associated with the separation of the company's performance chemicals business) were .54 per share, an increase from .45 cents per share in the year-ago. Consolidated net income, increased to $433 million from $285 million in the year-ago quarter.
The agriculture division saw revenues decrease 4 percent from the year-ago quarter to $1.6 billion as lower corn seed and herbicide volumes were partly offset by higher insecticide and fungicide volumes. The electronics and communications division saw sales decrease 2 percent to $623 million as operating earnings fell in part due to competitive pressure. The industrial biosciences division saw sales increase 4 percent to $318 million due to higher demand for enzymes for ethanol production. The nutrition and health saw sales increase 4 percent to $899 million as productivity improvement, higher volumes, better product mix and lower input costs increased the division's operating earnings. The performance chemicals division saw sales decreased 8 percent to about $1.6 billion as operating earnings decreased on lower pricing and portfolio changes. The performance materials division sales decreased 3 percent to about $1.6 billion as operating earnings increased as gains from higher ethylene and polymer volumes offset portfolio changes. The safety and protection division saw sales decrease 1 percent to $977 million as operating earnings were a result of productivity improvement initiatives and lower product costs.
DD reiterated its earnings guidance for 2014 and continues to see adjusted earnings per share for the year in the range of $4.00 to $4.10. DD acknowledged slow global economic growth in the fourth quarter along with adverse currency effects and continued weakness in its agriculture business. The company expects adjusted earnings per share for the quarter to increase about 20 percent from 59 cents per share in the year-ago quarter. DD is spinning off its performance chemicals division as it gradually refocuses on high-growth, less cyclical businesses. The company expects to spin-off the division by mid-2015.
Upcoming Spinoff In 2015
In October 2013, DD announced that it would spin-off its performance chemicals division ($7.2 billion in sales in 2012 representing about 21 percent of DD's total sales and $1.8 billion in pretax segment income representing about 29 percent of DD's total division income). The major businesses within the performance chemicals division are titanium dioxide, fluoropolymers and fluorochemicals. The company is spinning off such division, best known for the materials in nonstick frying pans and house paints, so that it can focus on higher growth businesses such as agriculture and nutritional products. The results for the performance chemicals division, however, tend to be volatile and are less likely to benefit from the kind of research DD is focusing on. The spin-off is the latest step in DD's effort to move away from lower growth commodity businesses toward higher growth areas and will be completed by early 2015 and will be a tax-free spin-off to DD shareholders.
FMC Is An Excellent Intermediate Takeover Candidate For DuPont
FMC is a specialty chemical maker, with products ranging from pesticides to biolpolymers, that had previously announced plans to split into two public companies, the latest savvy move from a conglomerate that has turned a collection of businesses, FMC was expected to retain its fast-growing agricultural solutions and health and nutrition segments, while a new company called FMC Minerals would hold the more cyclical lithium and soda ash businesses. In September 2014, FMC, however, announced that it had entered an agreement to acquire Cheminova A/S, a wholly owned subsidiary of Auriga Industries A/S. Cheminova is a multinational crop protection company based in Denmark. FMC funded the all-cash acquisition through a mixture of debt and existing cash reserves. The transaction will close in early 2015, will be accretive to adjusted earnings in the first full year following the acquisition and will broaden the company's agricultural business solutions portfolio and will significantly strengthen its market access in agricultural end markets. As a result of the acquisition, FMC modified its previously announced plans to split into 2 companies and instead will pursue a sale of its alkali chemicals business by mid 2015 to raise cash to de-leverage to a point that is an appropriate level for its business profile. The company also indicated it would now retain its lithium business as a separate operating division.
FMC's product portfolio has been impacted by market dynamics recently, and shares have dropped dramatically in 2014. The company's agricultural markets have been affected by a variety of factors around the world, while sluggish demand for the company's nutritional products in certain applications have impacted parts of its health and nutrition business. In addition, the company's minerals division was also affected by the unfavorable impact of operating in Argentina. The company's business is in transformation and the market should give its stock a higher valuation after such transformation begins to show results. Much of the company's businesses, however, are exposed to larger favorable secular growth trends in agriculture, lithium in electronic vehicles, and an aging population that favors its health and nutrition products.
The company is known for its disciplined financial controls, capital deployment, and shareholder friendly policies. FMC has begun raising its dividend and has been actively repurchasing shares as it divests noncore businesses. As stated, each of FMC's divisions is attractive. The company's agricultural division, which makes pesticides and crop-protection chemicals, is leveraged to long-term trends, such as the need to feed a growing population and increase protein consumption by an expanding middle class. The company's lithium division should benefit given that about a third of such business is lithium used for energy storage, a market that could experience rapid growth as companies such as Tesla Motors (NASDAQ:TSLA) and other electric car makers use lithium-ion batteries to power their cars. The soda ash division, which is used to make glass, has been negatively affecting FMC's earnings recently, but this division will be sold by mid 2015.
Given FMC's ongoing transformation, the company's slumping share price, the adverse market conditions the company currently faces and the complimentary business profile the company has when aligned with DD's business profile, FMC is an ideal acquisition target for DD as each company's near term transformational actions come to a close. DD has been retiring debt and repurchasing millions of shares of late and expects to complete its billion dollar share-repurchase program by the end of 2014. The company raised its dividend earlier in 2014. Any other substantial use of the company's cash is likely to be used for mergers and acquisitions. M&A will likely take place after mid 2015 while the company focuses on its cost-cutting program and the performance chemicals spin-off. Given that DD remains focused on the agriculture, nutrition, industrial biosciences, and advanced materials the transforming FMC appears to be an attractive takeover candidate once FMC completes their near term transformation.
DD's expansion further into agricultural products, its divestment of lower-margin businesses, and with the majority of the company's revenues coming from overseas, DD is positioned to benefit from positive secular trends in demand for agricultural products and greater global economic growth. The company's free cash flows will likely be able to fund internal growth, dividend increases share buybacks and potential acquisitions. The company is, however, experiencing some near-term challenges that the industry is facing in the agriculture, chemicals, and materials businesses. DD's current price to earnings ratio is about 21.5 and the shares yield 2.6 percent. In addition, the company has a recent history of raising dividends in addition to the company's substantial share buyback activity. DD's forward price to earnings ratio is 15.80 based on 2015 earnings estimates of $4.52, a premium to its diversified chemicals peers. We should note that DD has seen recent downward earnings estimate revisions. That said, with overall markets at or near record highs, an investor should wait for DD's share price to pull back to between $63.25 to $67.75 to establish a full position (a forward price to earnings ratio in the range of 14 to 15). Even if potential investors do not time their investments in DD shares perfectly, they will receive the company's modestly increasing dividend to reinvest in more shares. For prospective FMC shareholders, the company's shares have already experienced a share decline and may decline further before stabilizing. We are closely watching FMC shares for potential purchase as well as the company's share price languishes near 52-week lows. Finally, we should note that DD's shares have seen extensive insider selling with no purchases in recent years.
Disclosure: The author is long DD.
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