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DuPont’s (NYSE:DD) latest earnings release was a mediocre mixed bag of beats, misses, and lowered expectations. Although reported EPS of $1.48 beat the $1.46 analysts’ consensus forecast, revenues missed. Expectations were for $11.27 Billion but the top line disappointed at $11 Billion. As is often the case, market participants ignored the fact revenue was up 7% from the $10.26 Billion reported for the corresponding period in 2011 and took the stock to the woodshed for a whipping anyway. Management caution that full year guidance would come in at the low end of their prior forecast didn’t help. So what is going on with DuPont right now? Is this storied stock a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.
C = Catalyst for a Stock’s Movement
The company has lowered the bar for upcoming earnings releases by lowering expectations without actually lowering guidance. If they surprise and come in at or above the higher end, this “surprise” could act as a modest catalyst. Another potentially modest catalyst on the horizon is an appeal of the August 1st verdict in the patent infringement lawsuit pitting DuPont against rival Monsanto (NYSE:MON). DD’s share price took a modest dip following the announcement. The verdict has no immediate impact on DuPont’s revenue as they have yet to sell the product in question but going forward a more favorable settlement or a reversal of the jury decision could send a signal DuPont going forward will be better able to compete with Monsanto in the agricultural seed space.
H = High Quality Pipeline
This is the reason so many look at DuPont as a great long term BUY. From Teflon to Tyvek DuPont has arguably put forth more innovative products across a wide variety of applications than any company in history. In 2010 Massachusetts Institute of Technology (MIT) named DuPont to its inaugural list of the 50 most innovative companies in the world. With about 200 years of history behind them the culture at DuPont is now and always has been about using science and technology to address societal needs. Their current corporate vision calls for targeting three or the planet’s most pressing needs –feeding an expanding global population, reducing dependence on fossil fuels, and protecting both people and the environment. The DuPont corporate website tells us the company rolled out more than 1,700 new products in 2011, along with a record number of US patent applications.
E = Equity to Debt Ratio is Close to Zero
DuPont’s debt to equity ratio of 1.42 or 142% is a bit high. From the most recent 10-Q SEC filing we learn they have total long term debt of $11,254 Billion with an additional $3,696 Billion in short term debt and capital lease obligations and $3.5 Billion cash on hand. To put that into perspective, both their debt and cash position have remained relatively constant over the last five quarters, with the highest long term debt total of $12.2 Billion reported for the third quarter of 2011. The current long term debt Is slightly above the Q1 2012 level of $1.232 Billion.
A = A Level Management Runs the Company
With an impressive trailing twelve month Return on Equity (ROE) of 30.6% and an 11.37% gain in share price year to date, DuPont management must be doing something right. In 2010 management announced a plan to reduce fixed productivity costs by $1 Billion and already beat its 2011 targets. Their stated intention was to improve their balance sheet and increase shareholder dividend and a recent 5% increase in quarterly dividend serves as evidence of their success so far.
They are also repositioning the company away from its traditional mission of industrial chemical maker to a provider of diversified products in agriculture, energy, and safety and security. To accomplish this transition they have been aggressively acquiring companies and entering into joint venture partnerships to expand their global footprint.
T = Technicals on the Stock Chart are Strong
For the past few months DD’s share price has been moving below its 20 Day SMA (Simple Moving Average), remains higher than its 50 Day SMA, and higher than its 200 Day SMA. As of August 30th 2012 the share price was 1.3% below the 20 Day SMA, 0.3% above its 50 Day SMA, and 0.1% below its 200 Day SMA.
S = Support is Provided by Institutional Investors & Company Insiders
DuPont is 64.21% institutionally owned with names ranging from State Street to JP Morgan Chase to Blackrock to Fidelity, and others. Its .21% insider holders have been busy of late with 22.8% insider transactions reported since the beginning of 2012, with 8 sales and 7 Buys or Options Exercises. Total insider sales represented about 134 thousand shares while shares acquired represented about 132 thousand.
T = Trends Support the Industry in which the Company Operates
The world needs more food; cleaner energy to decrease environmental impact, and more safety and security. DuPont is already providing agricultural seed innovations, solar panel film improvements, and better bullet proof vests. A recent JV with Suntech Power (NYSE:STP) to address solar energy developments puts them squarely in the solar energy space as STP Is one of the world’s largest solar energy companies. Kevlar protective vests come from their Personal Protective Equipment Division. What more can we say?
In one way DuPont’s greatest strength could be its greatest weakness. They have so many ongoing R&D projects in so many fields that being spread so thin puts them at risk should the world slip into another credit freeze such as happened after the Lehman failure. In addition, as evidenced by the recent Monsanto (NYSE:MON) lawsuit, there is the risk of patent protection issues with the other mega-conglomerates looking to get into the same lucrative markets. Having said that, if you believe superior technology wins the day in the long run, DuPont’s scientific and technological muscle makes this company a worthy candidate for a long term BUY.
Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.
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