DuPont's Future Is Already on Solid Ground

01/30/2012 4:26 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The chemical giant is diversifying into higher-margin businesses, a move that's paying off already and stands to be a big boost when the Eurozone mess is over, writes MoneyShow's Jim Jubak, who also writes for Jubak's Picks.

DuPont’s fourth-quarter earnings results, announced on January 24, shouldn’t have come as any surprise. (The stock is a member of my Jubak’s Picks 12-18 month portfolio.)

Back on the chemical company’s investment day in mid-December, DuPont had said that it saw the next few quarters as tough, but that it saw a bright longer-term future thanks to its “new” businesses of nutrition and industrial bioscience. And that’s the story earnings told too.

Fourth-quarter earnings came in at 35 cents a share (excluding one-time items), beating Wall Street estimates by two cents. Revenue grew by 14% from the fourth quarter of 2010—if you count a big boost from acquisitions and currency. Excluding those two factors, revenue grew by just 4%. At $8.43 billion for the quarter, revenue came in just below the Wall Street estimate of $8.53 billion.

As you might expect in the current global economy, DuPont’s sales in its consumer electronics and construction businesses were weak in the quarter. Electronics sales, for example, were down 18% year-to-year.

But the company’s newer and non-traditional (for DuPont anyway) businesses continued to do well. Sales in the agriculture unit, for example, were up 8% year-to-year on higher prices (five percentage points of the eight percentage point increase in total growth) and increased volume.

Nutrition and health grew sales 138% year-to-year thanks to the acquisition of Danisco, which contributed $468 million of the unit’s $806 million in sales.

For 2012 as a whole, the company guided to earnings of $4.20 to $4.40 a share. That would amount to 7% to 12% earnings growth. The company added that it didn’t expect to see growth rebound until the second quarter.

A good part of DuPont’s earnings picture over the next few quarters depends on how deep the Eurozone recession is—the International Monetary Fund is projecting a mild recession, with GDP falling by 0.5%—since DuPont gets about 65% of its sales outside the United States.

At the level of the company’s guidance for 2012, this isn’t an expensive stock—the forward price-to-earnings ratio on 2012 earnings is 12 or so. By midway through 2012, I expect the stock to look cheaper with the company looking ahead to a modest recovery in the US and emerging market economies that should promise improved revenue in both its traditional and “new” businesses.

As of January 30, I’m keeping my target price at $58 by November 2012. At the January 30 price, the stock pays a 3.3% dividend.

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 here.

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