An Amazing Chemical Company (and more)

GuruFocus.com

In this article, let's take a look at E. I. du Pont de Nemours and Company (DD), a $60.34 billion market cap company, which is a broadly diversified company and is the second-largest U.S. chemicals manufacturer.

Great portfolio

The company as we said is a chemical producer, but in recent times, it has transformed its portfolio into agriculture, nutrition and biosciences. Shifting the portfolio was so good that the agriculture business makes up approximately a third of its operating profit.


Closing the Gap

The company faces strong competition in the seed industry, principally by Monsanto (MON). Over the past years, the company made efforts to close the gap with the leader, particularly in corn seeds. Moreover, in recent years, marketing and distribution were effective and even better than Monsanto�s strategies.

Chemical business

When talking about a key driver in its diversified portfolio, we must mention titanium dioxide production. TiO2 is a commodity used mainly as a hiding agent in paints. DuPont uses an exclusive chloride ilmenite process that allows it to convert low-grade feedstock to high-grade TiO2 and at a lower cost than its peers. Recently, it announced plans to spin off the performance chemicals business, so we will be waiting for this.

New products

DuPont launched lots of new products last year. The company's primary products are corn hybrids, photopolymers and electronic materials, fluorochemicals, fluoropolymers, engineering polymers, elastomers, packaging and industrial polymers and others.

Products such as Lycra and Kevlar, with applications in textiles and safety equipment, were a good bet demonstrating product development and innovation.

Strong cash

Dividend-payment history affirms its commitment to maximize shareholder wealth. The company raised its quarterly dividend by 4.4% to $0.47 per share. The current dividend yield is 2.8% which is quite enough to protect consumer�s purchasing power.

DuPont has paid dividends since 1904 and raised it in this time frame. Further, it is expected that the company will buy back shares worth $2 billion in 2014.

Revenues, margins and profitability

Looking at profitability, revenues declined by 1.68% but earnings per share increased slightly in the most recent quarter compared to the same quarter a year ago ($1.15 vs $1.10). During the past fiscal year, the firm increased its bottom line by earning $3.04 versus $2.58 in the prior year. This year, the market expects an improvement in earnings ($4.02 versus $3.04)

Finally, let�s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

DD

DuPont

29.87

DOW

Dow Chemical Co.

17.80

FMC

FMC Corporation

19.34

AGU

Agrium

15.63

Industry Median

6.72



The company has a current ROE of 29.87%, which is higher than its peers, and it is very attractive. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Dow Chemical (DOW), FMC Corporation (FMC) and Agrium (AGU) could be good options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 20.8x, trading at a discount compared to an average of 24.1x for the industry. To use another metric, its price-to-book ratio of 3.6x indicates a premium versus the industry average of 1.36x while the price-to-sales ratio of 1.7x is above the industry average of 1.02x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $23,994, which represents a 19.1% compound annual growth rate (CAGR).

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Final comment

An increasing demand due to a higher population will put on farmers to grow more food and this will benefit the company in the near future. Further, DuPont has a good strategy of innovation, making new fresh earnings.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio), Michael Price (Trades, Portfolio) and James Barrow (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

This article first appeared on GuruFocus.
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