Conglomerate DuPont (click ticker for report: ) announced a $1 billion share repurchase program Tuesday. The firm’s shares have been largely stuck in neutral (shares are about where they were at the beginning of the year), but we think the announcement signals that management believes the company is inexpensive at current levels.
DuPont also announced that its earnings per share for fiscal 2012 will come in at $3.25-$3.30 on a continuing operations basis, the high end of its previous guidance range (but wrapping the consensus estimate). More importantly, the firm provided earnings growth guidance of low- to mid-single-digits during 2013 thanks to strength from agricultural investments, advanced materials, and industrial biosciences. Sales are expected to grow in the low-single digits for the year. Excluding the impact of a weak chemicals segment, the company expects earnings to grow at least in the high-teens in 2013 compared to 2012.
We think the poor expected conditions in the firm’s Performance Chemicals segment, which is expected to be down substantially with margins falling 6-7 percentage points in 2013, bodes negatively for Dow Chemical (click ticker for report: ). However, the bad news is not necessarily terrible for peer Eastman Chemical (click ticker for report: ), which has a substantially different chemical product line-up than Dow and DuPont. We had highlighted Eastman Chemical in the November 2011 edition of our Best Ideas Newsletter (click here, page 5), calling for 35% pricing upside. Eastman has since delivered this return and more.
We think DuPont’s guidance (strong agricultural performance) reflects favorably on Monsanto (click ticker for report: ), one of the dominant players in the biotechnology portion of the agricultural space. With brutal growing conditions throughout much of 2012 due to widespread drought, we think farmers, who collectively have relatively strong balance sheets (incomes), will invest in greater technology to ensure a healthy harvest for 2013.
The new buyback signals that management believes shares are undervalued, and we think DuPont has upside to the high-$50s based on our fair value estimate (at the time of this writing). Still, the firm’s score on the Valuentum Buying Index (our stock-selection methodology) isn’t that great at the time of this writing, so we’re not rushing to add it to our portfolio. However, the company’s annual dividend yield of approximately 3.9% and its Valuentum Dividend Cushion qualitative rating of ‘good’ make the company an attractive total return investment, in our view. We’re watching the firm very closely.
Please click the following link for our Dividend Report on DuPont: