What do you do with DuPont (DD) now that Nelson Peltz's Trian Group has decided to agitate for change?
Pretty simple: You buy it. Why? Because he will win and the stock will go higher.
Winning isn't a one-dimensional concept with Peltz. He's pushing for big changes: splitting the company into a fast-growing enterprise made up of agriculture, nutrition, health and biosciences and a cyclical cash cow of a company with performance materials, safety and protection, electronics and communications.
Peltz believes that these changes, as well as a hefty adjustment in the company's unallocated spending (meaning spending that's just plain overhead) will get the $68 stock to $120. He wants a board seat to help make these changes occur. He says he hopes it is a friendly admission but, to me, it sounds like he's going to try to make it happen by a proxy vote, taking his case right to the shareholders.
DuPont didn't take long to react -- management put out a statement saying that the stock has gone up 220% since year-end 2008 (under CEO Ellen Kullman) vs. just 144% for the S&P 500. That's some pretty terrific outperformance, especially in a world where not many companies have trumped the benchmark in such superior fashion. The company's press release says it has had a " constructive dialogue" with Trian and is committed to bringing out shareholder value.
From Trian's white paper, it looks like that company has not been constructive enough and that it is not moving along the natural fault lines that Peltz wants. He has $1.7 billion dollars of skin in the game, so he's not going away any time soon.
And that's why you should buy it. Activists come and go, but the only one who has consistently made you money after he's made his position known is Peltz. That's because he brings out value whether he wins a seat or not. He just pressures a company relentlessly to take actions. While many of those actions are done by the companies' themselves, you know that he is holding their feet to the fire the whole time.
How does it work? In the document, Peltz talks about one of his biggest wins, Kraft Foods (KRFT): "Over the decade preceding the spinoff announcement, August 11, Kraft's share price had stagnated at $32. Moreover, despite being one of the largest global food companies with leading brands, Kraft's margins were consistently below peers and the company's shares traded at a discount to peers."
Peltz pushed and pushed for a division into a fast-growing and a slower-growing company, one with international promise and the other with a big dividend. Ultimately, he got his way and Kraft split into old Kraft and Mondelez (MDLZ), and the combined pieces trade at $55 a share, which is 77% higher than it was when he started.
This is not Peltz's first rodeo. When he has been allowed in, we have seen astonishing successes in companies as diverse as Wendy's (WEN) and Heinz . We have also seen terrific gains in PepsiCo (PEP), far better than in Coca-Cola (KO), although I would argue that the gains are from the hard work of CEO Indra Nooyi. No matter, I think Peltz is a shrewd judge of which companies are worth going after and good things happen when he gets long and loud.
Does this mean I believe in what Peltz wants to do? I think it's more than that. I believe you win if the company does what Peltz wants -- even if it just feels the heat, as we all do vs. when we aren't challenged. So get some DuPont, and get ready to rumble for a higher price.