The Good And Bad Of DuPont's Strength

By Stephen D. Simpson, CFA | October 25, 2010 AAA

If no good deed goes unpunished, then maybe it is true that good news from DuPont (NYSE:DD) can often come with a catch. While DuPont is a highly diversified chemicals and materials company, the company's products are all largely inputs for other companies' products. This sets up the good news/bad news dilemma - solid volume growth at DuPont should be reasonable confirmation that economic growth really is recovering, but solid price growth also points to the risk of oncoming cost-push inflation.

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DuPont's Third Quarter
DuPont disappointed no one with its sales performance in the third quarter, as revenue rose 17% and surpassed even the highest published analyst estimate. Growth was fueled both by mid-teens volume growth (14%) and mid-single digit price growth (5%).

This revenue growth was not necessarily balanced, however. Agriculture and coatings grew by single-digit amounts (and had the lowest volume-based growth), while electronics, chemicals, materials, and safety/protection all grew in excess of 20% (and all had volume growth above 15%).

Profitability was not nearly so strong, though, as reported pretax income fell more than 15% and EPS fell a bit more than 10%. On a segment basis, the story was a little better - segment pretax income showed a bit of growth, and excluding the pharmaceutical business from each period bumps the growth rate to nearly 33%. The problem with the pharmaceutical business is familiar enough to those who follow the space - patent expiry is taking away the highly profitable contributions of Cozaar and Hyzaar (partnered with Merck (NYSE:MRK)). (For more, see Pharma Patent Trolls: Cheap Drugs At A Steep Price.)

Looking Through DuPont's Earnings
Given DuPont's presence in so many businesses, there are definitely some read-throughs for other companies and industries. Strong performance in photovoltaics backs up the incredible revenue growth seen at solar panel companies like JA Solar (Nasdaq:JASO) and Suntech (NYSE:STP), while strong results in auto coatings is not so surprising given the improvements at automakers like Ford (NYSE:F) and the strong demand in China.

Likewise, companies including Huntsman (NYSE:HUN) (titanium dioxide), Albemarle (NYSE:ALB) and Dow (NYSE:DOW) may all see expectations shaped by DuPont's relatively solid performance.

The Bottom Line
DuPont is yet another one of those large industrial/commodity companies that is seeing solid current growth and a high stock price - high enough, in fact, that it is a little difficult to see major undervaluation in the shares. Although DuPont is not yet at peak earnings (or peak valuation, most likely), those will probably come sooner than some investors expect, as a company like DuPont is usually a better buy when things seem terrible. (For related reading, check out Decoding DuPont Analysis.)

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