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Just Because DuPont is Old, Don’t Write it Off
By: Martin Tillier
In most aspects of life, maturity is a good thing…just ask anybody, like me, who is over 50. When it comes to companies and their stock, however, maturity is not necessarily desirable. Detractors will accuse Microsoft (MSFT), for example, of being a mature company. The implication is that innovation, and therefore growth, has stopped. The stock can be placed in the retirement home category of “defensive”. It is unlikely to collapse, and pays an OK dividend, but growth and improved performance are things of the past.
Such a fate befell E. I. DuPont Nemours (DD) a long time ago. As you can see, the stock was hit hard during the financial crisis, but otherwise has traded in an approximate range of $37-57 for the last 10 years.
The break of that range came about three months ago, and when a stock that has been range bound for that long finally breaks out to the top side it has to be of interest. As you would expect, once that $56-57 resistance level was broken, it became a support, and has been tested and held three times since.
Often, that third test of a level is key, so once it held again earlier this month, my interest was piqued. I held off on any comment, however until Q3 earnings were reported on Tuesday, but now, as I look at that report, I feel that the old sleeping giant may be coming to life.
In the dark days following the 2008/9 recession a lot of the fat that inevitably accumulates around an old, staid company was trimmed. When Ellen Kullman took over as CEO in 2009, she faced a somewhat daunting task, but the stock price speaks loudly and clearly as to the market’s view of her efforts. Kullman has shown that along with cutting fat away, she is not afraid to slaughter a few sacred cows. The sale of the performance coating business to the Carlyle Group last year has worked out well, and she is considering doing the same thing with the underperforming performance chemicals unit.
That unit’s poor results weighed on the overall earnings numbers in Q3, along with a negative impact from a relatively strong dollar. Better than expected results elsewhere, along with lower than expected taxes and other items, led to reported earnings of $0.45 per share, handily beating consensus estimates of around $0.41.
My optimism for DuPont, even from these seemingly lofty levels, is mainly based on two areas where significant growth is possible, and where the company seems to be increasingly focused.
The agriculture division had a solid quarter, and DuPont’s penetration into emerging markets seems to be growing. Indeed, one could make a case that that success contributed to the quarter’s currency problems, as the US Dollar has been particularly strong in relation to most emerging currencies. In the long term this will stabilize and the increased market share can be expected to pay dividends.
Another bright area for DuPont was in parts for solar panels. Here in the US, many people’s view of this business is colored by the politicization of energy policy. What gets lost with the resulting polarization is that the rest of the world is quietly shifting to non fossil fuel energy sources. What is considered “alternative” here is now pretty much mainstream in many parts of the globe. Growth in that area can be expected to continue.
Part of the overhang for DuPont, as with many old, traditional companies, has been large unfunded pension obligations. That area too has seen significant improvement this year, partly as a result of the aforementioned sale to Carlyle. If interest rates and returns generally continue to rise, that significant drag on prospects could well be removed in the next few years. Of course, should the performance chemicals unit be sold along with their pension liabilities, that too would improve the situation.
Overall, refocusing a sprawling, 200 year old company on growth is no easy task. By showing a willingness to divest underperforming assets and emerge as a leaner, meaner company, however, Kullman has shown herself to be capable of doing that. It is rare for a “mature” company (or person for that matter) to become rejuvenated, but there are signs that just such a transformation is happening at DD.
If nothing else, a 3% dividend return and the nearby presence of a logical stop-loss level just below the $56-57 support make it unlikely that investing in the new growth story would prove to be too expensive in the event that this burst of energy is short lived. Maybe it is just because I am getting older myself, but the thought of a mature company finding new reserves of energy is strangely appealing.