Restructuring is Not Always Negative
12/12/2013 11:00 am EST
By eliminating certain less-profitable business units and spinning-off others, one company has totally reinvented itself, writes MoneyShow's Jim Jubak, also of Jubak's Picks, and now looks even more attractive.
E.I. du Pont de Nemours, hereafter DuPont (DD), is a clear case of addition through subtraction.After selling its performance coatings unit—which makes paints for cars and other industrial uses—for $4.9 billion in February, and after the planned spin-off of its performance chemicals unit—which makes titanium dioxide pigments used in paint, and paper, Teflon, and fluorochemicals—du Pont will look like a totally different company.
By subtracting the coatings and chemicals businesses, du Pont will have increased the percentage of revenues coming from such faster growing units as agriculture, nutrition and health, and industrial bioscience. For example, the agriculture unit, which includes Pioneer Hi-Bred, the world's largest seed company, will go to 37% of revenue, from 24% in 2011.
Acquisitions and divestitures have added faster growth, and subtracted slower growth. For example, the acquisition of enzyme company Danisco, added a business with long-term revenue growth projected at 7% to 9% a year; the spin-off of the performance chemicals unit will subtract a business with a projected revenue growth rate of 3% to 5%.
The resulting stripped-down company looks more like a pure play seed company, with major businesses in nutrition and health, and in industrial bioscience, attached.
What would you rather own? A chemical company that makes paints, or a seed company that developed the AQUAmax line of drought resistant seed corn?
Because investors still think of du Pont as a chemicals company, the shares trade at a substantial discount to those of a stock such as Monsanto (MON), that is thought of as a pure play seed company (despite the drag of its big agricultural chemicals business). Du Pont trades at 16.1 times forward earnings per share, while Monsanto trades at 21.3 times forward earnings per share.
Du Pont also pays a 2.93% dividend yield. (The stock is a member of my long-term Jubak Picks 50 portfolio.)
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of du Pont or Monsanto 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.