DuPont Has Exactly What I Want—Everything

11/02/2011 1:14 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

All I want is everything from a stock right now.

I can’t depend on the wider global or US economy providing fuel for earnings and revenue growth, so I’d like to buy shares in a company with a strong internal engine.

I certainly don’t want to take on greater than market risk—that’s quite enough on its own, thank you—so a low price-to-earnings ratio and reasonable expectations are basic requirements.

It wouldn’t hurt, as long as we’re on the subject of valuation, if investors were currently overlooking the company’s strengths, or mis-characterizing it as slow and sluggish when it’s not.

And I want a dividend yield better than the yield on ten-year Treasuries to support the share price, and to give me something to squander on food and gas if I have to wait for a while before the share price goes up.

Oh, and just in case I’m being too pessimistic about the market—and the switch is about to flip back to risk-on from the risk-off position of Monday and Tuesday of this week—I’d like these shares to show me a record that includes a big gain during the rally that stretched from October 3 to October 28.

That’s not asking for too much, is it?

I can even think of one stock that fits this bill: E.I. du Pont de Nemours and Company (DD), or DuPont to its friends.

The company reported third-quarter earnings on October 25 of 69 cents a share, beating Wall Street estimates by 13 cents. Revenue climbed by 32% from the third quarter of 2010 to $9.24 billion, above the Wall Street projection of $8.85 billion.

Where did these earnings and revenue surprises come from?

Well, some came from the high-tech relatives of DuPont’s traditional chemical business. Revenues in the performance-chemicals business were up 28% (even though volumes fell 1%, prices climbed 29%).

One of the big winners was the company’s Titanium Dioxide business, where revenue rose 29%. What to know what a performance chemical is? TiO2 is a good place to start: It’s used in pigments, optical coatings, ceramic glazes, and has potential as a photo catalyst and in the detoxification of waste water.

But the other big performance came from areas that most investors don’t associate with DuPont. Sales of seeds (the company owns Pioneer Hybrid) and pesticides rose by 41% from the third quarter of 2010. Nutrition and health sales climbed 178%, thanks to acquisitions.

For all of 2011, the company raised guidance to $3.97 to 4.05 a share from its previous $3.90 to $4.05 projection. The Wall Street earnings projection is $3.97.

All this, and the stock still trades at just 11.4 times trailing 12-month earnings per share, with earnings growth projected at 22%.

There’s a considerable safety net besides a relatively low price-to-earnings ratio. The shares pay a dividend yield of 3.4%, and the payout has been growing lately—it climbed 11% in 2011. The company also bought back 2.2 million shares in 2011, and has the cash flow to continue to buy more.

You’re not giving up a chance at very attractive gains if the market decides to go back into rally mode, either. From the October 3 low to October 28, the shares gained 28%. The 52-week range is $57 to $37. And shares closed at $46.88 on Tuesday. That’s a 5% drop from the October 28 close.

And one last thing—that internal catalyst I mentioned up top. There have been repeated rumors in the last week or so that DuPont is looking to sell its auto-coatings business.

The business of providing topcoats, basecoats, and primers to the auto industry is one of DuPont’s biggest by sales, but it is a relatively low-margin business (7% or so, about half of the company’s overall margin), and the company’s strategy is to dispose of businesses where it hasn’t been able to improve margins.

A sale would give DuPont cash to pay down debt added in the acquisition of enzyme powerhouse Danisco, as well as to deploy in higher-margin businesses. And the sale would certainly move the stock.

DuPont has been a member of my Jubak Picks 50 long-term portfolio since January. It’s now trading slightly below the $48.52 price on January 18. I’m keeping in that portfolio, but I’m also adding it to my Jubak’s Picks portfolio as of November 2.

My target price is $65 a share by November 2012. I think the shares offer the kind of mix of potential gains and limited downside risk that I like in this very volatile market.

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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of DuPont as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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