Is DuPont a Good Stock to Buy?

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DuPont (NYSE: DD) has fallen 8% in the last year against a rising market. The $46 billion market cap company produces chemicals, agricultural products, and industrial materials. In 2012 DuPont’s revenue increased only 3% compared to the previous year, with higher sales in the U.S. and Canada- the largest geographic segment, responsible for about 40% of revenue, offsetting smaller declines in EMEA and Asia-Pacific. In terms of the company’s several businesses, growth was led by Agriculture as well as Nutrition and Health. With costs rising at a faster rate, and with an increase in charges related to employee separation and asset write-downs, DuPont experienced a 20% decline in earnings.

In terms of value, DuPont looks a bit expensive at 17 times trailing earnings; even if the company was growing its net income at the same rate as its revenue, that growth rate would probably still be too low for that multiple. So in our view the market is pricing in a considerable improvement in the business, and Wall Street analysts agree with this view: consensus for 2014 implies a forward P/E of only 11. A multiple in that range seems more reasonable for DuPont, but net income will have to hit analyst targets first and we aren’t sure we’d want to rely on the company doing so. DuPont does pay a moderately high dividend yield at 3.5%.

We track 13F filings from hedge funds and other notable investors as part of our work researching investment strategies, and can also use our database to see which funds owned DuPont at the end of 2012. Billionaire Ken Griffin's Citadel Investment Group was buying DuPont in the fourth quarter and closed December with a total of about 440,000 shares in its portfolio. Levin Capital Strategies, managed by John Levin, more than doubled the size of its own position to 1.2 million shares (find Levin's favorite stocks).

DuPont’s peers include Dow Chemical (NYSE: DOW) and Air Products & Chemicals (NYSE: APD). Dow is quite similar to DuPont in quantitative terms: its trailing earnings multiple is high, but optimistic forecasts from the Street place the company at 11 times forward earnings estimates. As with DuPont, however, business has not been particularly strong (revenue actually dipped 1% last quarter compared to the fourth quarter of 2011) so even though the dividend yield is high it doesn’t look like a good value right now. Air Products & Chemicals at least has both trailing and forward P/Es in the teens, and reported double-digit growth rates of both revenue and earnings in its most recent quarter compared to the same period in the previous fiscal year. It might be worth looking into how sustainable those results are as the larger chemicals players seem to be struggling.

We can also compare DuPont to smaller diversified chemical companies Eastman Chemical (NYSE: EMN) and FMC (NYSE: FMC). The trailing earnings multiples here are 24 and 19, respectively, with the sell-side again laying out an earnings trajectory that brings the forward P/Es considerably lower. At these two companies, however, sales numbers have been quite good: in the fourth quarter of 2012, Eastman grew its revenues by over 20% versus a year earlier while FMC improved its top line results by 10% (and grew its net margins as well). So at first glance it seems more likely to us that these companies will meet the high expectations of Wall Street analysts, and as such if investors do want to buy into the optimistic take on the industry there might be better places to start a deeper analysis.

DuPont and Dow look speculative to us: any value case depends on the companies delivering considerably better earnings in 2014 than in 2012. The other peers we looked at here have much gentler expectations, and their financials have been showing considerably better results as well; therefore at least at this point we would consider them better prospects for a value portfolio.

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 position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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