Why DuPont’s Failing Stock Could Be a Buy on Weak Guidance

Source: Thinkstock

Source: Thinkstock

DuPont (NYSE:DD) shares fell 2 percent in after-hours trading on Thursday as the company reported that its earnings per share this year would fall short of initial expectations. The company now expecting to earn $4.00 – $4.10 per share excluding extra items, and we should point out that the company expects to take a $0.20/share restructuring charge this year as it expects to be able to save approximately $1 billion as a result during the next 5 years.

With the stock down after running over 25 percent in the past year, is this a buying opportunity or a warning sign?

Investors should note the particular reason why DuPont is revising its earnings expectations downward. The revised expectation comes predominantly from one segment: agricultural products and seeds. The company expects that revenue from sales of corn seeds to be down. Furthermore, while U. S. soybean plantings will be up this year, DuPont will be missing out on much of this because it is transitioning to a new genetically modified soybean seed.

While the company is claiming that this disappointment is a one-time event we should keep in mind that DuPont’s counterpart — Monsanto (NYSE:MON) — has been outperforming in the seed and pesticide sector, and while I think that Monsanto shares have run too far, it is clear that Monsanto is outcompeting DuPont.

We should note that around the turn of the century, Monsanto transformed its business from a diversified chemical manufacturer — much like DuPont — to a company focused on genetically modified seeds. DuPont is now seeing how well Monsanto has performed and it appears to want to emulate its rapidly growing competitor. The trouble is that Monsanto had a head start, and this is crucial in a technology driven industry such as biotechnology.

DuPont will make this transition, and its seed business is growing. So that’s good news. But at the same time, the company’s fastest growing profit generating segment is seeing setbacks this year, and one has to wonder whether it will be a reliable driver of growth going forward.

Thus, DuPont trades at a seemingly reasonable valuation at 17 times forward earnings (this assumes that numbers will be revised down slightly after Thursday’s announcement), but at the same time most of its businesses aren’t growing meaningfully, and the one that is is second rate to Monsanto, and probably to Syngenta (NYSE:SYT) — these companies’ Swiss competitor — as well.

Unless a company is truly inexpensive, I don’t think it is worthwhile to buy it assuming it is a secondary or tertiary competitor in an industry. The risk that the company will lose market share is simply too high. Thus, investors who are in DuPont shares have had a nice run and it is probably a good time to sell. Investors interested in owning an agricultural chemical company should look towards competitor Syngenta. Monsanto, while a growing company, is simply flying too high for my liking. Syngenta trades with a similar valuation to DuPont’s although it has a larger and faster growing agricultural chemical business.

Investors looking for a large chemical producing conglomerate should consider Dow Chemical (NYSE:DOW), which has established itself as America’s leading diversified chemical manufacturer, and its Dow AgroSciences division will give you exposure to the agricultural chemicals and seed industry.

Disclosure: Ben Kramer-Miller has no position in the stocks mentioned in this article.

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