It seems like there is a segment of the investment community that is committed to believing that DuPont (NYSE:DD) will eventually figure out the right mix of businesses that will let it transcend its historical cyclicality and volatility. To be fair, management at DuPont has always been willing to move into higher-potential areas like agriculture, performance materials, and nutrition, but these efforts have never managed to decouple the close correlation of the company's performance and global GDP growth. Accordingly, I'm not sure I'd want to pay a premium to buy these shares.

First Quarter Results Mostly On Target, But Sluggish
DuPont reported 2% growth this quarter, with underlying volume improvements of 2% and 1% better pricing. Unusual for a company this size, there weren't huge surprises on a business by business basis. Agriculture was the big grower again, with sales up 14%, while nutrition was up 7% and the other business were flat to down. Performance chemicals were notably weak (down 17%) on a double-digit sequential fall in titanium dioxide prices, while electro-comm sales fell 9% on ongoing weakness in PV demand.
Even with decent volume, DuPont's margins were mediocre. Gross margin slid almost one point, and reported operating income fell 8%. Segment profit performance wasn't much different, falling almost 8%. Not surprisingly, agriculture was also the profit leader this quarter as income rose 13% and margins exceeded 32%. Performance chemicals saw significant margin erosion.
Ag Taking On More Of The Load
DuPont's seed and ag chemicals business continues to be a major profit source for the company. While quarter-to-quarter benchmarking can be a little tricky, the fact remains that DuPont's seed business (up 14%) outgrew the seed business of Monsanto (NYSE:MON) this quarter, and DuPont seems to have enjoyed a very strong corn planting season in South America.

SEE: Analyzing Corporate Profit Margins

It will be interesting to see if DuPont can continue this momentum. Monsanto has generally been outperforming DuPont in the field and in the lab as well, with Monsanto recently winning a significant IP case (and a settlement from DuPont). On the other hand, DuPont has an interesting drought-resistant corn out this year and I wonder if the company reaps any benefit for Monsanto being the face of the advanced seed industry – Syngenta (NYSE: SYT), DuPont, BayerBASF, and Dow (NYSE:DOW) are all in this business as well, but most of the hysteria and psuedoscience centers on Monsanto.

Will TiO2 Take Away The Ag Leverage?
DuPont has a lot of good things going on in the agriculture business, not just with modified seeds, but with biobutanol and cellulosic ethanol. Likewise, the nutrition business looks like a steady, high-quality growth opportunity.
I wonder, though, whether the dynamics of the titanium dioxide industry will strip away some of that leverage. Price and volume has been weak lately, though the recent trends in volume seem incrementally better for other players like Huntsman (NYSE:HUN). DuPont is the market leader, though, and the company will have to work hard to keep the negative margin spillover from hitting estimates.

The Bottom Line
DuPont gets a lot of credit for its value-added businesses, but sometimes I wonder if it gets a little too much credit. In particular, it seems like DuPont has to often go back to the M&A market to supplement its growth or market exposure needs. While DuPont's trough returns on invested capital are better than most other chemical or advanced material companies, I do still wonder if investors are too happy to pay up for these shares.
As the economy improves, I expect DuPont shares to head higher. With that, though, I do wonder about the long-term returns that are available at this price. Accordingly, I think there are better plays in specialty chemicals, agriculture, and materials.

At the time of writing, Stephen Simpson owned shares of Monsanto Company.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Conglomerate

    A company that owns controlling stake in a number of smaller ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!