DuPont Diversification the Right Move

 | May 10, 2013 | 9:00 AM EDT
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We have been recommending DuPont (DD) since last May, based on the company's transformation from a cyclical chemical company into a science-based conglomerate with a focus on agriculture, bio-based industrials and advanced materials.

Our thesis has been that as the company's portfolio of businesses improves it will generate higher and more consistent returns and be rewarded with a higher multiple and share price. Everything we heard at last week's investor day increased our conviction that CEO Ellen Kullman has the company on the right path and is keenly focused on improving shareholder returns.  Significantly, she reaffirmed the long term sales and earnings growth targets of 7% and 12% and said that dividend growth would be in line with earnings growth.

Kullman led off the four-hour meeting with a summary of how DuPont's portfolio of businesses is better positioned in growth markets than it was 18 months ago, at its last investor day, and how the mega trends of global population growth are creating opportunities for the company. DuPont, she said, is a market driven science company

Kullman analyzes the company's seven businesses through the prism of three scientific areas, agriculture, biosciences and material science. In agriculture she highlighted market share gains in corn and soybeans. In nutritional health and food markets, she noted how the Danisco acquisition brought a customer list including the most recognized food and dairy companies in the world, giving DuPont a world leading industrial bioscience capability.

Going though each business segment she pointed out strengths and weaknesses and discussed how the portfolio is under continuous review. If she determines that a business cannot earn an adequate return it will be divested, as was the case with the recent sale of the Performance Coatings business for $5 billion.

Similarly, she addressed the issue of the company's titanium dioxide business. Here she sees a business which, even at its low point, has earned well in excess of its cost of capital and at its peak has exceptional returns on capital. But she also acknowledged that its volatility makes it unpredictable. Therefore it is under continuous review, but now is not the time to sell it.

A final point she made concerned DuPont's global reach.  Approximately 60% of the company's sales are outside of the U.S. and 32% of sales are in faster growing developing markets.

Kullman has a clear vision of where she wants to take DuPont and she is implementing that vision in a very thoughtful and disciplined way.

DuPont offers investors a good and still improving mix of businesses led by a first rate CEO and a 3.25% plus dividend that will grow along with earnings. Based on reasonable valuation, a solid and improving dividend and its favorable business outlook we think DuPont is a compelling buy and look for the stock to trade in the low to mid 60s over the upcoming six to 12 months.

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