Not Your Father’s DuPont

01/10/2008 12:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of the Turnaround Letter, says the chemical giant has transformed itself into an innovation machine yet trades like a stodgy old industrial firm.

EI DuPont de Nemours, or DuPont (NYSE: DD), began operating in 1802 as a maker of gunpowder and explosives. Then around 1900, it began transforming itself into a broader chemicals and materials company. Among the innovations that came out of DuPont in the 20th century were nylon, Teflon, and Kevlar.

In the latter part of the 20th century, the company diversified into oil and gas and pharmaceutical products. In the late 1990s, earnings and the stock price both began to slip. Then, as DuPont began its third century, it transformed itself again. It spun off its Conoco energy operations in 1998, sold the pharmaceutical division in 2001 and sold its textile business in 2005.

Today, DuPont uses cutting-edge science to produce a wide range of products and services for markets including agriculture, nutrition, electronics, communications, safety and protection, home and construction, transportation, and apparel.

Management has had little time to celebrate the company’s transformation. It was hit hard by hurricanes Katrina and Rita in 2005, and that was quickly followed by a sharp rise in materials and energy costs. More recently, it has been challenged by weakness in the automotive and housing markets.

However, DuPont is proving very resilient. Driven by innovative products, the company has been able to target growing markets in agriculture, biotechnology, electronics, specialty materials, and safety, while maintaining its position in its traditional markets.

DuPont’s research and development continues to come up with key new products. It has produced more than 1,000 new products in each of the last several years. Fully 34% of 2006 sales were from products introduced within the preceding five years. Year to date, the company has filed for 1,100 patents, of which 300 are biotechnology-related.

DuPont has also successfully targeted many of the fastest growing geographical markets. In the most recent quarter, the company had double-digit year-over-year sales growth in China, Eastern Europe, and Latin America. Moreover, with 64% of sales generated outside the US, DuPont stands to benefit significantly from the weakness in the dollar.

The company has solid finances, including $1.2 billion in cash. DuPont has paid a dividend every quarter since 1904, and it recently increased the dividend to provide a very generous 3.6% yield at the current stock price.

For all of its innovation and growth prospects, DuPont trades at only about 14x this year’s expected earnings, more appropriate for a stodgy old industrial company like DuPont once was. While weakness in the automotive and homebuilding sectors still obscures some of the stock’s long-term potential, we expect that cloud to lift in the not-too-distant future. We recommend buying DuPont now up to $60. (It closed Wednesday below $45—Editor.)

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