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Time to Be Long in a Science Company?
Posted by: Damian Illia (IP Logged)
Date: March 17, 2014 04:37PM
On Dec. 31, Michael Price (Trades, Portfolio) added E. I. du Pont de Nemours and Company (DD) at an average price between $56.94 and $64.65 and currently holds 320,000 shares of the stock with a current value of $21 million in his portfolio.
So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.
The company’s subsidiaries and affiliates conduct manufacturing, seed production or selling activities and some are distributors of products manufactured by it. The company consists of 13 businesses which are aggregated into eight reportable segments. The company’s reportable segments are Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, Safety & Protection and Pharmaceuticals.
DuPont launched 1,753 new products in 2013. The company’s primary products are corn hybrids, photopolymers and electronic materials, fluorochemicals, fluoropolymers, engineering polymers, packaging and industrial polymers, and elastomers, among others. Turning our attention to the catalysts we see a cost-cutting strategy while restructuring work schedules and improving working capital productivity. Expansion to biotech and biofuels will strengthen the company´s portfolio, as well as the acquisition of Danisco in the food ingredient and enzyme markets.
Looking at the financials, the company has a strong balance sheet: good cash that allows it to reward current shareholders through dividend and share repurchases. Dividend-payment history affirms its commitment to maximize shareholder wealth. The company raised its quarterly dividend by 5% to $0.45 per share. du Pont has raised its dividend and paid in the last 110 years. The company will buy back shares worth $2 billion in 2014.
Its fourth-quarter 2013 earnings per share topped the Zacks Consensus Estimate. The firm is currently Zacks Rank # 3 – Hold, and it also has a longer-term recommendation of “Neutral.” For investors looking for a Zacks Rank # 1 – Strong Buy, Methanex Corporation (MEOH) could be the option.
In terms of valuation, the stock sells at a trailing P/E of 12.7x, trading at a discount compared to an average of 19.1x for the industry. To use another metric, its price-to-book ratio of 3.8x indicates also a premium versus the industry average of 1.53x and the price-to-sales ratio of 1.7x is above the industry average of 0.96x. Two metrics indicate that the stock is relatively undervalued relative to its peers.
Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago. It has demonstrated a positive trend over the past five years. In the next graph we include the stock price because EPS often lead the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. Let´s compare the current ratio with competitors in the next table:
The firm's revenues rose more than 5% from the same quarter one year prior. Moreover, net operating cash flow increased as well to $5 billion, demonstrating the improvement of the company´s strength.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Jeremy Grantham (Trades, Portfolio), David Dreman (Trades, Portfolio), David Tepper (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Tom Russo (Trades, Portfolio) and PRIMECAP Management (Trades, Portfolio) have also invested in it.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Guru Discussed: David Dreman: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: DD, MEOH, DOW, PPG,
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