STOCK WATCH


DuPont: Reinventing Itself

Jeffrey R. Kosnett

Shares of the chemical giant have taken off since the company started shifting its focus to agriculture.



A common bit of advice for investing in tumultuous times is to trust in the tried-and-true: Buy stocks like Procter & Gamble, GE, 3M, Johnson & Johnson and McDonald's. Such famous, well-respected companies have a global presence, good balance sheets and are highly unlikely to be ensnared in scandal or to report a humongous earnings miss.

So why is the stock of a sedate chemical company whose best-known branded products are used in construction and remodeling whipping that whole crowd? Shares of DuPont (symbol DD), which closed at $49.02 on April 9, are up 12% year to date. Not too bad considering that DuPont's ten-year annualized return is zero. Among members of the Dow Jones industrial average, only Wal-Mart is up more so far this year.

The explanation: DuPont -- formally E.I. DuPont de Nemours and Company -- has a new growth kick, one that's literally about growth.

DuPont is re-emphasizing its scientific heritage, specifically in matters dealing with farming and food, which, if you're paying attention, is a hot button among investors. Speculators have driven the price of grains and other foodstuffs to bubble levels. Although prices for corn, soybeans and wheat are falling from last winter's peaks -- and will undoubtedly drop more -- there's no question that the world needs more food and that farmers and agribusinesses all over the planet have the money to invest in advanced methods of production.

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DuPont is involved with seeds, herbicides and biotechnology solutions, as well as its basic chemistry expertise. It has a huge research and development budget and a full pipeline of new products and hoped-for innovations.

DuPont has targeted Brazil, where the government is making more land available for cultivation and where investment and food production are soaring, and Eastern Europe, where the former communist nations seek to reverse generations of underproduction under Soviet-mandated systems. You can find details on DuPont's investor Web site.

Suffice it to say that DuPont is optimistic about this area. The company, based in Wilmington, Del., predicts that its ag sector will generate profit growth of 15% per year through 2010, up from 2% growth from 2004 through 2006. DuPont's mid-March analysts' meeting was all about ag and spent little time on, say, Corian countertops.

It's a nice story, but the key question is whether problems in other parts of the company will offset the good news on the farm front. Wall Street still views DuPont, for the most part, as a general chemical company, and chemical makers are paying through the wazoo for natural gas and oil and other feedstocks, so profit margins are thin. Other DuPont businesses, such as coatings and materials, are hardly growing at all.

Revenues in the ag sector rose 21% in the fourth quarter from the year-earlier period, compared with 6% growth for the whole company. But agricultural products still account for only one-sixth of revenues.

That's why analysts are a bit surprised at the stock's strength. Bill Selesky of Argus Research is one of many who attended a mid-March analysts' meeting with DuPont's chief executive and other high officers. At that time, Selesky had a "buy" rating on the stock, which was then trading at $47. He has since reduced his rating to "hold."

But Selesky actually likes the company and isn't down on the stock: "My concern is that the whole chemical segment, like Dow Chemical, is paying heavily for its raw materials [oil and natural gas] and that all of the inflation we're seeing there will eat into profits. The valuation of DuPont is not particularly high and the agricultural side is doing phenomenally well." But he's waiting for a big drop in the price of oil before he upgrades DuPont shares.

Other analysts apparently agree -- just as many say "hold" as say "buy." And while DuPont has a great global presence and pays a high dividend (the stock yields 3.3%), that's been the case for ages, and the stock has been sorely disappointing.

Perhaps the clearest signal that this 208-year-old company is trying to reinvent itself will come on April 22, when it releases first-quarter results. In March, DuPont added two cents to its forecast of quarterly earnings, which is now $1.14 to $1.19 per share. In the first quarter of 2007, the company earned $1.07. So to call DuPont a growth stock is stretching it.

But there's no question that change is afoot. DuPont is trying to put distance between itself and the economically sensitive chemical industry, stressing its scientific know-how and the hundreds of patents it wins every year in biotechnology and agriculture.

For years, though, the shares have been a millstone around the Dow average and a drag on many portfolios. It may take a few more quarters of improved results before you can make a solid case that DuPont will lead the market higher.




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