A Paradigm Shift From Chemicals to Agriculture

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Weak market conditions coupled with sluggish sales growth has led DuPont (NYSE: DD), Dow Chemical Co. (NYSE: DOW) and FMC Corporation (NYSE: FMC) to focus more on growth markets and shift towards agricultural products. Amid this transition we will scrutinize how DuPont is in a better position to contain market declines and provide its investors with the desired returns.

Recent Events:

DuPont has made news by announcing a spin off of its chemical business, since the company intends to focus on sales in less volatile markets, such as agriculture and biotechnology. DuPont’s chemical business was in a fix ever since the prices for Titanium Dioxide dropped,and margins were depressed due to low pricing. DuPont’s chemical business took a nose dive and dropped by 56 %. To top that, gas prices have also doubled as compared to the last year. This, coupled with uneven economies. has led to a decline in the chemical business sales, hence, the company is shedding off its chemical unit to enhance margins and returns.

However, to the brighter side drought resistant seeds helped the company double its profits, with agricultural sales elevated by 11 %. North American market has also picked up increasing the demand for its corn seeds, insecticides and fungicides, opening up huge growth avenues for the company.

Low ethane costs have helped Dow Chemical boost its margins, however a surge in gas prices could potentially increase input costs for Dow. Moreover despite high unemployment Dow Chemical Co. is troubled with finding skilled workers able to perform tasks needed in a growing environment. If these pressures end up requiring higher wage costs, Dow Chemical might struggle to keep overall expenses in line, and this might suppress margins.

Moving on to a few figures, we realize that the company sales declined by 2% due to weak market demand, however, agriculture sales increased by as much as 14 % due to accelerated product sales. Moreover, Sadara Project, a joint venture between Dow Chemical and  Saudi Arabian Oil,  is an integrated chemical complex with a capacity of producing 3 million metric tons of high value performance plastics and specialty chemical products. This joint venture ensures a stream of $500 million in equity earnings for Dow, for the first 10 years from start up.

FMC,  in its domain, is very active in acquisitions to strengthen its portfolio as well as enhance its product reach. Recently the company acquired Omega 3 producer EPAX Nutra for $345 million, to strengthen and expand FMC’s presence in the high growth nutraceutical market. The high growth market presents an array of opportunities for the company. In another deal, FMC has acquired patented, broad spectrum crop protection product from Bayer CropScience. Furthermore, FMC will develop and distribute the novel product for row crops in the U.S. and Canada, anticipating a surge in sales and margins.

FMC’s industrial chemical units is faced with a decline in its revenues of as much as 5% from an year ago resulting in a 37% decline in earnings due to lower export pricing in soda ash and lower domestic volumes, hence a focus towards agricultural products. The market conditions are speculated to remain tough, since weak demand coupled with a decline in prices and low turnover might further suppress the revenues and margins.

Analyzing Ratios:

<table> <thead> <tr><th> <p><strong>Indicators </strong></p> </th><th> <p>DuPont</p> </th><th> <p>Dow Chemical Co.</p> </th><th> <p>FMC Corporation</p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Price/Earnings TTM</strong></p> <p><strong> </strong></p> </td> <td> <p>22.0</p> </td> <td> <p>41.5</p> </td> <td> <p>19.3</p> </td> </tr> <tr> <td> <p><strong>Price/Book</strong></p> <p><strong> </strong></p> </td> <td> <p>4.4</p> </td> <td> <p>2.4</p> </td> <td> <p>6.0</p> </td> </tr> <tr> <td> <p><strong>Revenue Growth </strong></p> <p><strong>(3 Yr. average) </strong></p> </td> <td> <p>8.9</p> </td> <td> <p>8.2</p> </td> <td> <p>9.9</p> </td> </tr> <tr> <td> <p><strong>Net Income Growth </strong></p> <p><strong>(3 Yr. average)</strong></p> </td> <td> <p>16.7</p> </td> <td> <p>22.2</p> </td> <td> <p>22.1</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> <p><strong> </strong></p> </td> <td> <p>42.7</p> </td> <td> <p>5.4</p> </td> <td> <p>32.0</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong></p> <p><strong> </strong></p> </td> <td> <p>3.03%</p> </td> <td> <p>3.72%</p> </td> <td> <p>0.78%</p> </td> </tr> <tr> <td> <p><strong>Current Price </strong></p> <p><strong> </strong></p> </td> <td> <p>$57.59</p> </td> <td> <p>$34.99</p> </td> <td> <p>$63.65</p> </td> </tr> </tbody> </table>

Data from Morningstar on 26th July 2013.

Upon analyzing the key ratios we notice the low dividend yield FMC provides despite being highly priced among its competitors, the company has been cutting back on its dividends to fuel its acquisitions. On the other hand DuPont with a low 35 % payout ratio has the ability to increase its dividends, on contrary Dow Chemical has a strikingly high payout ratio of 156%, indicative of an unsustainable condition and slow growth.

DuPont lags behind its rivals in terms of net income growth, since the chemical business has been pulling down margins for quite some time now. However, DuPont provides the highest return on equity, while Dow Chemical struggles with its ROE.

Final Thoughts:

All the three companies in question are aggressively diversifying into agriculture; however DuPont and Dow Chemical, due to the size of their operations. are in a much better position than FMC. DuPont intends to focus on growth markets such as agriculture and biosciences, which it deems more profitable. Like its biggest competitors Dow has also diversified into agricultural products, far beyond its pure chemical business, however it only defines a minor portion of its business. The company remains more exposed to market conditions in the chemical sector, marked with lower demand cycles.

DuPont on the hand has certain products in its pipeline which are gaining traction in the market. For instance, in its industrial bioscience division new enzyme launches in laundry detergents paints new opportunities for the company. With all these companies present in the agriculture sector, DuPont due to early entry has an advantage over the two of its rivals. In the light of the above mentioned, DuPont might be a better option.

Zain Raza has no position in any stocks mentioned. 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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