Better Living Through Agriculture

05/15/2008 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Yiannis G. Mostrous and Roger Conrad, editors of Vital Resource Investor, say chemicals giant DuPont has become a global agricultural powerhouse.

EI du Pont de Nemours (NYSE: DD) is the second-largest US chemical company in market capitalization and sales. The company is divided into five segments:

• Agriculture/Nutrition
• Coatings and Color Technologies
• Electronic and Communication Technologies
• Performance Materials
• Safety/Protection

DuPont is one of the world’s largest producers of corn, soy seed, and crop-protection chemical products.

Agricultural sales should surpass $7 billion this year, mainly because of better expected sales of triple stacks (resistance and protection against corn borer and corn rootworm) corn seeds. DuPont has aggressively picked up market share in corn seeds in Brazil and has also realized strong growth in insecticides in Europe and South America.

DuPont has been allocating a lot of resources to research and development (R&D), focusing on new technology in corn traits that can offer triple herbicide resistance to increase productivity gains.

The big potential of the agricultural business has sparked talk of potential separation of the agricultural arm of the company. Until now, management has maintained that shareholders are better served under the current arrangement.

It remains to be seen if this view will hold, as the market has been increasingly attributing more value to the innovation and growth potential of the agricultural division. Additionally, an eventual spinoff could potentially unlock hidden value and reward current stockholders even more.

DuPont’s main appeal is its strong global presence and diversified market exposure. This was seen clearly when the company reported first-quarter 2008 earnings, with sales up by 9% despite weakness in the US auto and housing market. More than 60% of sales come from outside the US, at least 25% of which is generated in emerging markets.

By 2010 the company expects almost half of its revenue growth will come from emerging markets, contributing to around 30% of total revenue.

DuPont will endure challenges this year because of higher costs in sulphur and urea raw materials used in herbicides, as well as high natural gas costs and soybean commodity prices.

The electronic and communication technologies division has benefited from strong demand for refrigerants and photovoltaic products. This is expected to continue as the energy efficiency investment theme unfolds. 

On the other hand, the coatings and color technologies division is most challenged by weakness in the US auto and housing markets. But foreign demand is expected to pick up some of the slack. The same is true for the performance material division.

DuPont has successfully implemented its lower-cost strategy and recently revealed a new $800-million three-year, fixed-cost productivity target. Given its past success in the area, we expect it to deliver once again. The company is also aiming to reduce variable costs by $1 billion in the next three years. DuPont is a buy at current levels (around $50—Editor).

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