The spike in food and commodity prices has meant we are all feeling the pain of higher bills every time we go to the grocery store. However, some companies are actually benefiting from higher food prices and the rise in demand of all things related to food production. These are the stocks of agricultural chemical companies that include DuPont Co (DD), Dow Chemical Co (DOW), Potash Corp. of Saskatchewan (POT) and Monsanto (MON). All these companies have enjoyed healthy rises in their stock prices, especially POT and MON which are more pure play agriculture companies. However going forward I believe that a more diversified sector play like Du Point (DD) will offer better returns to investors, especially over the longer term. It also has a very healthy 3.4% dividend yield which makes it both a growth and income stock. Here is a review of the stock and the reasons why I recently bought the stock.
Business Activities : DuPont (full name is E. I. du Pont de Nemours and Company), stock symbol DD, is a science-based products and services company. Operating in more than 90 countries, DuPont offers a wide range of products and services for markets including agriculture and food; building and construction; communications; and transportation. About 60% of consolidated net sales are made to international customers.
Growth Potential and Positives for the stock
- A healthy and sustainable dividend (3.4%) will ensure this stock turns above inflation even if capital gains are moderate. It’s P/E ratio of 13.5 is less than the industry average and many of its competitors. Combine this was a 5 year Price Earnings Growth (PEG) of 1.74 and the stock looks good from a fundamentals perspective. It also has moderate levels of debt with a Debt to Equity ratio of less than 1.-
DuPont reaffirmed its expectations of achieving at least 30 percent North America seed corn market share for 2008 and growing share for the region in future years. Globally the picture is the same as countries like India and China agricultural needs rise due to a growing and more affluent population that will consume more and higher quality food products.
- The ongoing severe food shortage driven by a demand-supply mismatch has been driving the agricultural industry to invest in more and better technology to protect crops as well as maximize yield. As such, this presents significant favorable market conditions for DuPont whose crop protection product business accounts for the largest portion of its total revenue.
- Competitor Dow Chemical recently increased prices which should allow DuPont to follow suit. This allows them to pass on higher input costs from energy and raw material.
- Sales in emerging international markets grew 25 percent, led by Brazil, China, India and Eastern Europe. Given the growing international market and weakening US dollar it is a very positive sign that DuPont’s market share and sales in overseas markets like China and India are rising.
- The company has a growing presence in the Solar (photovoltaic) market which it expects to grow by over 30% over the next several years . This rapidly growing market and technology could provide a key future growth catalyst for the company once the agriculture boom slows.
- The company is adversely affected by rising oil and energy prices. “For DuPont, raw material and energy cost escalation is expected to significantly outpace the increases we experienced– almost double that of 2007 impacts, so average-range price increases are expected,”. As long as the cost increases can be passed on to their customers (likely) the company should be able to mitigate the rising energy cost impacts.
- Reduced current and ongoing demand in the United States for the company’s products sold into construction and motor vehicle markets moderated results in the Safety & Protection and Coatings & Color Technologies segments. Given the US still accounts for a significant portion of the companies revenue this is a risk, but most US companies are being impacted by the domestic recession which makes having international exposure and sales (like DuPont has) critical for growth.
- A global slowdown or severe weather disruptions (for farming) would also have a major impact on this stock as it would for any multinational company.
What the pundits are saying
- Overall analyst rating for this stock based on Yahoo! and MSN finance is 2.5. This is equivalent to a hold rating.
- DuPont reaffirmed its fiscal 2008 earnings outlook of $3.40 to $3.55 per share and its first half of 2008 earnings outlook for growth of about 10%, excluding significant items. For the second quarter of 2008, it continues to expect earnings of about $1.05 per share. According to Reuters Estimates, analysts on an average were expecting the Company to report EPS of $3.48 for fiscal 2008.
- Our lower risk assessment reflects the company’s diverse business and geographic sales mix and its leadership positions in key products, offset by the cyclical nature of the chemical industry and the volatility of raw material costs. [S&P]
Rising earnings forecasts, a hefty 62% of sales from overseas, and a relatively skinny P/E ratio make this stock look like a winner. Sales of agricultural chemicals in developing countries are a particularly bright spot. And the stock’s 3.6% yield means that you get paid handsomely to wait for the market to recover. [Michael Sivy - Money Magazine]
This stock is a solid blue chip stock to have in your portfolio over the long term. It is a well diversified company and a top player in the booming agriculture and food markets. The introduction of new and innovative products across its lines of business (like those targeting the Solar energy market) will also help this company in the long run. After recent pullback, I am a buyer at the current price ($47.22) and am planning to open a small position of about $2000 initially with an aim to grow my holding to about $10,000 over the next few months. [Update : I just bought $2000 worth of the stock today @ $47.89]. My price target for this stock is $52 to $55 by year end, which is a 12 to 15% appreciation from today if you include the dividend yield.