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George Soros’ Pick in the Chemical Business
Posted by: Vanina Egea (IP Logged)
Date: November 22, 2013 09:46AM
As world population continues to grow, so does demand for food. In an attempt to satisfy that demand, agricultural industry producers can find a profitable opportunity. However, the companies related to the industry require a high investment on research and development. In other words, the stride needed by chemical companies to absorb market synergies can sink the business altogether. George Soros is one of the newest gurus investing on the industry, with EI DuPont de Nemours (DD) and The Dow Chemical (DOW).
Market Positioning and Stronger Portfolio
Dow Chemical is the second largest chemical company in the industry by market size, characteristic that granted the business a dominant position. With international exposure reaching over 160 countries worldwide the company´s products are present in almost every industry known to men. And although performance plastics and materials generated 50% of sales in 2012, the agriculture segment has become ever more important since the ignition of a joint venture with Monsanto in 2012.
Dow Chemicals has few rivals in the low-barrier basic chemicals segment due to structural integration, production technology, and lower-than-average energy and feedstock costs. Also, through a $20 billion joint venture with Saudi Aramco will open new opportunities in eastern markets and considerably lower feedstock costs. However, the current business model continues to drive activities away from the segment
A clear picture of the driving away from basic chemicals arises when looking at Dow Chemicals’ new joint ventures and acquisitions. The Rohm & Haas acquisition, for example, widened product offering and turned the firm into the world’s leading specialty chemicals and advanced materials. Additionally, Dow AgroSciences has partnered with Monsanto for the development of the next generation of advanced weed and insect control technology in corn. This holds a great potential for growth given that Monsanto has already successfully introduced an insect resistant soybean trait.
The balance sheet for Dow Chemicals is moderate due to thin operating margins and stable revenues. Currently trading at 16.3 times its trailing earnings, the stock carries an 11% discount to the industry average. Jean-Marie Eveillard has turned into the guru holding the largest stake in a single stock purchase. Meanwhile, George Soros made his first buy, although the position is considerably smaller. I share the optimism shown by both gurus because of the firm’s portfolio restructuring and joint venture with Monsanto.
Margins Will Trouble Development
EI du Pont de Nemours is less exposed to the international market, and less able to offset international events. Nonetheless, the company is present in 80 countries and is also tilting its portfolio towards the specialty chemicals segment. Acquisitions are also an important part of the business model, and a great emphasis has been placed upon research in genetically modified seeds. Opposite to Dow Chemical, the agriculture segment is not another segment, but the most important.
Corn seed is the star among EI du Pont de Nemours agriculture segment. A higher demand for corn hybrids in North and South America continue to drive growth in the present. And record yields in the first region added to growing planting area in the second feed long-term positive prospects. However, the crop side of the segment is expected to experience some headwinds with the introduction of insect-protected seeds by Monsanto.
EI du Pont de Nemours implemented cost cutting strategy supported by reduced fixed costs, retrenched employees, restructured work schedules and improved working capital productivity continues to give positive returns on overall performance. The approach has allowed the firm to develop and grow new products for the agriculture segment. The business division received an important push by Danisco’s acquisition in 2011.
Financially, EI du Pont de Nemours is moderate due to declining margins. Currently trading at 21 trailing earnings, the stock carries a 14% premium to the industry average. By far, James Barrow is the guru with the largest position in the firm, with 10 times more shares than the second largest stake, held by Jean-Marie Eveillard. Only the first increased his stake during the last quarter, but I do not share his optimism due to rapidly deteriorating margins.
Margins Are Important
I prefer Dow Chemical to EI du Pont de Nemours because of its wider margins. Additionally, both are carrying out similar portfolio restructuring initiatives while exploiting opportunities in the agriculture industry. And even though Dow Chemical’s agriculture segment is smaller, the joint venture completed implies the association with industry giant Monsanto.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
Guru Discussed: George Soros: Current Portfolio, Stock Picks
Stocks Discussed: DD, DOW,