Du Pont (DD:NYSE) 2005-06-21
Du Pont was formed in 1802.
In 1915, it was incorporated in Delaware. It has paid a quarterly dividend every quarter since the fourth quarter of 1904. Today, it’s yielding about 3%.
There are some good reasons to buy DuPont (DD) right now, as a possible rebound stock.
Back in 1999 this Blue chip stock was trading at around $70, now you can pick it up for below $50.
DuPont gets over half of its revenues from sales overseas. It is a multi-national company and it operates in seventy-five countries.
Already, this year ,we see the S&P 500 adding industrial stocks like Baker Hughes (BHI), Archer Daniels Midland (ADM), Ingersoll Rand (IR), Monsanto (MON), and Norfolk Southern (NSC). Every calendar year is dominated by several investment themes. If you get in on the theme early, you can ride the trend. 2005 looks like we should see a rebound in industrial stocks.
Du Pont is a quality business. It is a company filled with more tangible assets than intellectual property. And it is actually shedding some of its less defendable patent assets and returning to a core business of high-end specialty manufacturing. Dupont's annual report discloses that the company has over 22,000 worldwide patents. It also has about 2,100 unique trademarks. By selling its textiles business to Koch Industries in late 2003, DuPont got out of the business of trying to defend the brand name and patents on Kevlar and Teflon (among other textiles.)
Instead, the company is focusing on other segments: agriculture and nutrition, coating and colors technologies, electronic and communica-tion technologies, performance materials, safety and protection, and pharmaceuticals.
In the first 9 months of 2004, DuPont racked up $23.5 billion in sales, a 2.5% increase over the same nine-month period last year.
The largest grossing segment was Agriculture and Nutrition, with $5.2 billion in sales. Performance materials was next at $4.8 billion. Coating and Color came in with $4.4 billion, $3.4 for safety and protection and $2.4 for Electronic and Communication Technologies. Pretax operating income for all segments was $2.1 billion. And of that the Agriculture segment again contributed the largest portion with $892 million or 41% of pretax income. Safety, coatings, and electronic combined for the bulk of the rest of the pretax income, with $1.5 billion in aggregate income (the textiles business lost $479 million.)
The core of the business will remain in those three segments. But the agriculture and nutrition segment represents a real opportunity for sales and income growth.
Pioneer Hi-Bred International is a wholly owned subsidiary of Dupont. It’s the world’s largest seed producer and helps improve crop yields with hybrid seeds. Its two big products are hybrid seed corn and soybean seed.
Demand for some other commodities may cool in 2005. But global appetites are not getting any smaller. It’s not DuPont’s core business, but it is a driver of new sales revenue, especially in Europe and South America, and of course in Asia.
Dupont also formed a new venture in 2003 with Bunge. The Solae Company, which is majority owned by Dupont, promotes soy-based foods. It’s more of a marketing effort for soy foods than your traditional old economy venture. But it’s a nice way of diversifying the company’s assets in a market that is sure to grow and without taking inordinate risk on an unproven venture.
There are of course risks to investing in Dupont. The largest one is raw materials costs. The company discloses that the performance materials segment, in particular, is affected by rising oil and gas costs. Energy is a basic input into their finished goods, and its cost has a real impact on the profitability of DuPont.
Other risks include a ratcheting up of trade wars over agricultural products. And there are the ever-present risks of regulation and litigation, as well as the time and expense of defending patents and intellectual property from global thieves.
Those risks aside, at least you will not be taking the risk of buying an overpriced stock. Dupont is selling for almost half of its 2000 selling price. It trades at 17 times next year’s earnings. That is not bargain basement cheap, but it should not leave a lot of downside risk, at this price.
More importantly, Dupont has real assets. It makes things in America that the rest of the world needs. It trades profitably in goods. And you get paid a 3% dividend to own it. As a cornerstone of a conservative portfolio, we think, DuPont is a good buy now.
Buy DuPont (DD:NYSE) up to US$48