Profiting from a Rival's Problems

10/29/2010 9:16 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Shares of DuPont (NYSE: DD) have been in a slow retreat ever since the company announced third-quarter earnings before the New York markets opened for trading on October 26—not because of anything the company reported, in my opinion, but because in the last week or so, we’ve moved into a “sell the news” reaction to just about all good earnings reports.

If that continues for a bit (and I’ll try to define “a bit” at the end of this post), I think you’ll get a chance to pick up the shares of a seed company that is taking advantage of troubles at competitor Monsanto (NYSE: MON) for a very reasonable price.

For the quarter, DuPont reported earnings of 40 cents a share, six cents above the Wall Street consensus. Revenue grew by 14% from the third quarter of 2009 to $7 billion. Wall Street had projected revenue of $6.76 billion.

And DuPont raised guidance for the full year to $3.10 a share. That’s above the $3.04 Wall Street consensus and the range of $2.90 to $3.05 in the company’s previous guidance.

Not bad results, hey? Well, since then, the stock has slipped a bit, from $47.70 on October 25 to $47.03 on October 28. I think that’s a reflection of a general weakness in the market in the last few days and of some profit taking in DuPont shares, which had climbed to a new 52-week high at $48.

What especially interests me in the shares—beyond the company’s expectations for continued strong demand from global markets in its chemicals business—is the gains in market share reported for its seed business.

The company’s seed business, Pioneer Hi-Bred, increased its market share in corn by three percentage points (to 35%) and by five percentage points (to 31%) in the soybean market.

Some of that gain comes thanks to disarray at competitor Monsanto, which very aggressively priced its most recent generation of seeds and then saw market pushback from farmers who didn’t see the extra performance in the field that would have justified all of that higher price.

I’m putting this on my Watch List, looking here for a slight further pullback to near the 50-day moving average at $44 a share. (That’s my definition of “a bit”); I’d be a buyer near that price.

The shares currently trade at 13.7x trailing-12-month earnings per share. That’s below the 14.7x multiple for the Standard & Poor’s 500 and the five-year average price-to-earnings ratio of 15.5x for DuPont itself. And, by the way, the shares currently pay a dividend yield of 3.47%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio here.)

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