Is DuPont a Good Stock to Buy?
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Diversified company DuPont (NYSE: DD) is best known for its performance chemicals and other materials that are used for industrial purposes, but it also provides seeds and a variety of biological chemicals to agriculture and food customers. DuPont’s sales were up 7% in the second quarter compared to a year earlier. Higher sales in agriculture, biosciences, and nutrition made up for small declines in many other segments. This was a lower growth rate than what the company had seen in the first quarter of 2012, but the results for the first half still came out to a 10% gain on the top line. However, higher operating expenses have limited the upside for the company, and so earnings were actually down 3% in Q2 versus the same period in 2011. Cash flow from operations also declined in the first half of the year as DuPont made a larger contribution to its pension plan.
DuPont appears to have a stable, low-growth business overall, though its revenue mix has been changing to reflect growth in agriculture-related products. It also pays a dividend yield of 3.5%, and is well capitalized with a $45 billion market cap and an enterprise value of about $57 billion. Therefore, its trailing P/E multiple of 13 seems that it might be a bit low, and with analyst consensus for 2013 implying a forward P/E of 11 it certainly looks like the market is being pessimistic about the company’s future.
Clint Carlson’s Carlson Capital owned about 890,000 shares of DuPont at the end of June, down 16% from what the fund had owned at the beginning of April (find more stocks in Carlson Capital's portfolio). Our insider trading database has recorded a number of insider sales at the company so far this year (see a history of insider sales at DuPont), though insider sales are often not as strong signals as insider purchases because it is quite reasonable for an executive at a company to want to diversify their wealth away from the same company where they earn their income.
Dow Chemical (NYSE: DOW) is DuPont’s closest peer. Dow pays an even higher dividend yield at 4.6%, making it an interesting choice for income investors. On a forward basis, it is priced about even with DuPont- its forward P/E is also 11- but there are a couple points which concern us. First, this parity in relation to forward earnings estimates comes as a result of higher expected growth at Dow, as it trades at 18 times trailing earnings, a substantial premium. Second, its business is in worse condition than DuPont’s: in its most recent quarter Dow’s revenues were down 10% and its earnings were down 31% from the same period a year ago. In terms of value, DuPont seems to be a better buy than this peer.
We can also compare DuPont to smaller chemical companies Eastman Chemical (NYSE: EMN), Air Products & Chemicals (NYSE: APD), and FMC Corporation (NYSE: FMC). Of these three, Eastman is the only one that trades at a discount to DuPont on a forward earnings basis (its P/E is 9), with the other peers trading at 13 and 14 times forward estimates, respectively. Eastman saw declines in both revenue and earnings in the second quarter versus a year earlier, and with its drop in net income being greater than DuPont’s the larger company could be trading at a more attractive value.
Air Products and Chemicals matches DuPont’s trailing P/E of 13, and saw a large increase in earnings last quarter; we might look at it more closely to see why analysts expect no earnings growth next year. FMC’s shares are up 44% over the last year, though this has carried it to a valuation of 20 times trailing earnings and its bottom line has not even been growing. We would avoid it.
DuPont generally seems like a better investment than its peers, and notably a better value than Dow. We would recommend researching Air Products and Chemicals further, but in general investors who want exposure to chemicals should look closely at DuPont.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.