DuPont: Long-Term Teflon, Short-Term Worries
12/20/2011 1:00 pm EST
You’re entitled to feel whiplashed by DuPont (DD) over the last week or so.
First, on December 9, DuPont announced that fourth-quarter earnings would come in at 28 cents to 36 cents a share, well below the Wall Street consensus of 46 cents a share.
The problem, the company said, is that customers are cutting back on orders on fears of a global economic slowdown, preferring to draw down inventories rather than risk getting caught with raw materials they don’t need. The problem has been spread across DuPont’s businesses in plastics, autos, general packaging, home building, and electronics. Europe, no surprise, is the weakest region.
Second, on December 13 at the company’s investor day, DuPont said, in effect, that Wall Street had overreacted by cutting projections for full-year 2011 earnings to $4.23 after the negative pre-announcement. For 2011, the company projected earnings of $4.20 to $4.40 a share.
Cost cutting and synergies from the acquisition of Danisco—$300 million and $130 million, respectively—are materializing sooner than expected. Although the businesses the company mentioned in the December 9 preannouncement are indeed slowing, growth is more than holding up at the fast-growth industrial biosciences and nutrition and health segments.
DuPont said it expected long-term annual earnings growth of 12% (at the high end of company guidance of 10% to 13% annual growth) on long-term sales growth of 8% to 10% in agriculture, 10% to 12% in industrial biosciences, and 7% to 9% in nutrition and health.
What is DuPont really telling investors? That the long-term picture for growth remains extremely promising, but that projecting near-term growth is very, very difficult. I don’t think DuPont is alone in wrestling with that problem.
If DuPont were the old cyclical commodity chemical company of even ten years ago, I’d say the risk of a deeper than expected economic downturn was sufficient to turn this into a sell.
But DuPont has become a collection of high-growth businesses, such as its seeds, nutrition, industrial biosciences, and performance chemicals units. Absent a really severe downturn, they will continue to generate solid growth of 10% or more. (On the other hand, the company’s performance-coatings business—its old auto-coatings business—remains decidedly cyclical. Growth there will be more like 3% to 5% over the long term.)
The shares are down roughly 8.5% from where I bought them on November 2 for my 12-18 month Jubak’s Picks portfolio. I think the shares will be a good performer in the second half of 2012, and with their 3.7% yield I’m going to hold until then—unless the economic picture darkens even more than expected.
I am cutting my target price to $58 a share from my previous target of $65 by November 2012, in recognition of the increasing evidence of a recession in Europe next year.
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 September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.