September 16, 2014 Volume XL, Issue VII & VIII - 19 - E.I. du Pont de Nemours and Company NYSE: DD Dow Jones Indus: 17,131.97 Initially Probed: S&P 500: 1,998.98 Last Probed: Russell 2000: 1,150.97 Trigger: Yes Index Component: S&P 500 Type of Situation: Business Value Introduction/Overview Despite recent initiatives to streamline its operations, including the pending mid-2015 separation of its Performance Chemicals business (~20% of 2013 sales), DuPont (―DD‖ or ― the Company‖) will continue to operate as a conglomerate with a focus on Agriculture and Nutrition, Industrial Biosciences and Advanced Materials. During 2013, DuPont generated nearly $36 billion of sales from 13 businesses whose result are reported within the Company’s 7 primary operating segments. Throughout its 211-year history, DuPont has been at the forefront of science and innovation which is demonstrated by its 44k global patents that are currently owned or pending. This includes 1,050 U.S. patents granted in 2013, the most in DD’s history for a single year. DuPont’s products and services are targeted to a wide range of industries including agriculture, consumer products, housing, energy and automotive, among others. Since its inception, DuPont has undergone numerous transformations as its business has evolved to meet the growing needs of modernizing economies. Under the direction of Ellen Kullman, DuPont’s current CEO who took the reins in 2009, the Company has been actively transitioning its portfolio to that of a higher growth science-based Company. The Company’s recent portfolio transformation began in earnest in 1999 when DuPont purchased Pioneer Price: $ 65.83 Shares Outstanding (MM): 918.7 Fully Diluted (MM) (% Increase): 925.6 (0.1%) Average Daily Volume (MM): 3.8 Market Cap (MM): $ 60,931 Enterprise Value (MM): $ 68,382 Percentage Closely Held: Insiders own < 1% 52-Week High/Low: $ 69.67/56.94 5-Year High/Low: $ 69.67/30.54 Trailing Twelve Months Price/Earnings: 20.8x Price/Stated Book Value: 3.6x Long Term Debt (MM)* : $ 11,798 Implied Upside to Estimate of Intrinsic Value: 35% Dividend: $ 1.80 Yield: 2.7% Net Revenue Per Share: TTM: $ 38.14 2013: $ 38.30 2012: $ 36.95 Earnings Per Share: TTM: $ 3.17 2013: $ 2.59 2012: $ 3.38 Fiscal Year Ends: Company Address: Telephone: Chairman/CEO: December 31 1007 Market Street Wilmington, DE 19898 302-774-1000 Ellen Kullman Clients of Boyar Asset Management, Inc. do not own shares of DuPont. Analysts employed by Boyar’s Intrinsic Value Research LLC own shares of DD common stock.
Transcript
September 16, 2014 Volume XL, Issue VII & VIII
- 19 -
E.I. du Pont de Nemours and Company
NYSE: DD Dow Jones Indus: 17,131.97 Initially Probed: S&P 500: 1,998.98 Last Probed: Russell 2000: 1,150.97 Trigger: Yes Index Component: S&P 500 Type of Situation: Business Value
Introduction/Overview Despite recent initiatives to streamline its
operations, including the pending mid-2015 separation of its Performance Chemicals business (~20% of 2013 sales), DuPont (―DD‖ or ―the Company‖) will continue to operate as a conglomerate with a focus on Agriculture and Nutrition, Industrial Biosciences and Advanced Materials. During 2013, DuPont generated nearly $36 billion of sales from 13 businesses whose result are reported within the Company’s 7 primary operating segments. Throughout its 211-year history, DuPont has been at the forefront of science and innovation which is demonstrated by its 44k global patents that are currently owned or pending. This includes 1,050 U.S. patents granted in 2013, the most in DD’s history for a single year. DuPont’s products and services are targeted to a wide range of industries including agriculture, consumer products, housing, energy and automotive, among others.
Since its inception, DuPont has undergone numerous transformations as its business has evolved to meet the growing needs of modernizing economies. Under the direction of Ellen Kullman, DuPont’s current CEO who took the reins in 2009, the Company has been actively transitioning its portfolio to that of a higher growth science-based Company. The Company’s recent portfolio transformation began in earnest in 1999 when DuPont purchased Pioneer
Fiscal Year Ends: Company Address: Telephone: Chairman/CEO:
December 31 1007 Market Street Wilmington, DE 19898 302-774-1000 Ellen Kullman
Clients of Boyar Asset Management, Inc. do not own shares of DuPont. Analysts employed by Boyar’s Intrinsic Value Research LLC own shares of DD common stock.
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Hi-Bred for $7.7 billion. Under CEO Kullman’s watch, the Company has increased its presence in life sciences businesses while shedding commodity/cyclically-oriented businesses. In 2011, DuPont acquired Danisco ($5.8 billion), which expanded its presence in food ingredients, while the 2013 acquisition of a controlling stake in South African-based Pannar Seed bolstered its seed business outside of the U.S. Meanwhile, recent divestitures include the 2013 sale of its Performance Coatings business (~$4 billion of after-tax proceeds) and the upcoming separation of its Performance Chemicals business. Shares of DuPont have performed well since CEO Kullman took over (up 151% vs. 126% for the S&P 500), though it is worth noting that they have been a significant underperformer versus peers over longer time horizons. For example, over the last 10 years, shares of DuPont are roughly flat compared with an 8-fold increase for Monsanto and a 6-fold increase in Syngenta. While we acknowledge that these companies are not perfect comps, we would note that DuPont’s Agriculture business will account for over 40% of revenues and over 50% of profitability (up from 32% and 42% of revenues and operating earnings, respectively in 2013) following next year’s Performance Chemicals spin off.
We view favorably the upcoming Performance Chemicals spinoff, which has a number of important implications for DuPont’s valuation. While the Performance Chemicals business throws off good cash flow, we believe the uneven results generated by the business have weighed on the multiple that investors assign to the DuPont conglomerate. In addition, the Performance Chemicals spinoff should also provide DuPont the opportunity to further strengthen its already robust balance sheet. While the Performance Chemicals business has proven to be volatile (operating earnings declined by 45% during 2013), the business generates strong cash flows even during cycle lows. Accordingly, DuPont is likely to receive a large dividend from the spinoff as it places an outsized amount of debt with the entity. We would expect a large amount of the proceeds to be used for share repurchases and would note that management recently instituted a $5 billion authorization ($1 billion repurchased in the first half of 2014). The separation is also providing DuPont an opportunity to further streamline its operations. Indeed, In June 2014, DuPont announced that it would be taking actions to realize $1 billion in annual cost savings, including roughly $675 million in annual savings to be achieved by the end of 2015.
Following the 2015 spinoff, DuPont will still operate in a number of disparate businesses, but as we noted above, the Agriculture segment will account for roughly half of overall earnings. We believe the Agriculture unit is the Company’s crown jewel as it has a strong competitive position in an industry with attractive long-term growth prospects. Notwithstanding some challenging conditions during 2014, the Agriculture segment has posted strong results in recent years. Between 2008 and 2013, segment revenues increased at a 12% CAGR with operating margins expanding 600 bps to 21% from 15%. DuPont is attractively positioned in the seed business and its key corn and soybean markets (over 60% of segment sales) are dominated by just two competitors (DuPont and Monsanto). Meanwhile, the Company’s crop protection business has been aided by the 2008 launch of Rynaxypyr, which achieved blockbuster status with over $1 billion of annual sales in 2013. Both Agriculture businesses (seed and crop protection) have strong new product pipelines, which should help sustain the segment’s operating momentum.
At current levels, DuPont is trading for just 10.7x adjusted trailing EBITDA. Factoring in normalized earnings from the Company’s Performance Chemicals business this multiple declines by a full turn to 9.7x. In our view, this valuation is inconsistent with the Company’s portfolio of attractive businesses with strong market shares and good growth prospects. Applying a 12x multiple to our estimate of the Company’s 2016E EBITDA for the Agriculture business and a 9x multiple to our 2016 projection for the non-Agriculture/Performance Chemicals segments, we derive an intrinsic value of $89 a share, representing 35% upside from current levels. We believe additional upside is possible if DuPont is able to further streamline operations and/or make additional progress in addressing its bloated cost structure. Activist investor Nelson Peltz has recently called for a breakup of the Company, which could lead to additional value enhancing initiatives.
Portfolio Transformation Accelerating – Positioning DuPont For Higher Growth DuPont has undergone numerous transformations during the course of its 212 year history. Since its
inception, the Company has been involved in a number of different businesses including explosives, pharmaceuticals, chemicals, and energy, among others. The Company’s latest initiative to reinvent itself began in 1999 when it purchased Pioneer Hi-Bred, an agriculture technology company, for $7.7 billion. In conjunction with the Pioneer acquisition, DuPont’s then CEO Charles Holiday abandoned the Company’s tagline ―Better Things for Better Living … Through Chemistry,‖ which was part of DuPont’s identity for nearly seven decades
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and changed its slogan to ―The Miracles of Science.‖ The Pioneer acquisition provided the foundation for the Company’s push into the higher growth agriculture market.
Under the leadership of CEO Ellen Kullman, who became CEO in 2009, the Company has accelerated its transformation from an industrial company serving cyclical markets to one focused on building leading positions in higher growth businesses. DuPont’s current strategy has centered on Agriculture and Nutrition, Bio-Based Industrials and Advanced Materials. Management believes that each of these industries offers the opportunity for DuPont to leverage its strong science-based capabilities and to build a distinctive portfolio of high-margin, growth businesses. To accomplish its goals, the Company has taken a number of actions to reposition its portfolio including both acquisitions and divestitures. DuPont’s $5.8 billion acquisition of Danisco in 2011 has provided the Company with strong capabilities in the nutrition and bio-based industrial markets. Meanwhile, the Company has bolstered its agriculture business with multiple bolt-on acquisitions including the 2013 acquisition of a controlling stake in Pannar Seed, a South African based seed Company that should help DuPont capture a greater presence in faster growing emerging markets. Divestitures are also playing a prominent role in the Company’s recent and ongoing transformation. In 2013, the Company sold its Performance Coatings (automotive paints) business to private equity firm Carlyle for $4.9 billion, which was followed by the 2014 sale of its glass laminating and solutions business for approximately $500 million. In October 2013, DuPont announced (ostensibly as a result of some prodding from activist investor Nelson Peltz as discussed in a later section) that the Company will be spinning off its Performance Chemicals operations sometime in mid-2015. As illustrated in the graph below, The Company’s portfolio of higher growth businesses (excludes coatings and chemicals) increased at a 8% CAGR rate between 2008 and 2013 and above the Company’s targeted long-term growth rate of 7%.
Higher Growth Portfolio Delivered 8% CAGR from 2008 - 2013
* 2008 includes sales from Performance Coatings, classified as discontinued operations. ** CAGR calculated based upon Segment Sales and excludes Performance Coatings and Performance Chemicals in all periods presented. Source: Company presentation, May 2014
Recent Actions Should Help Unlock Value Though Further Portfolio Actions Likely Although DuPont shares have performed well in the wake of the 2008/2009 downturn, they have been a
significant underperformer over longer time periods. Since 2001, shares of DuPont shares are little changed compared with a roughly 8-fold increase for agriculture peer Monsanto and a 6-fold increase for peer Syngenta.
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While we recognize that DuPont is not a pure play agricultural business, we believe that the strong
performance of the Company’s Agriculture segment has been overlooked within DuPont’s conglomerate structure. Following the expected separation of the Performance Chemicals operations in mid-2015, DuPont’s Agriculture operations will account for over 40% of total revenues, up from 26% in 2009 when CEO Kullman took over. In our view, the removal of the cyclical chemicals operations should allow DuPont to command a higher multiple since the highly profitable Agriculture business, which is the Company’s most profitable segment, will be responsible for over 50% of earnings. As we discuss in greater detail below, DuPont’s Agriculture business has a strong position in an attractive industry with multiple growth opportunities. While the soon to be divested Performance Chemicals segment has the ability to post strong margins, the cyclical nature of the business has likely held back the Company’s multiple.
Performance Chemicals - Summary of Recent Results ($MM)
Despite recent initiatives to streamline its operations, DuPont remains a conglomerate with exposure to various industries. The Company is currently comprised of 13 businesses (streamlined from 23 businesses when Kullman took over in 2009), many of which, despite the Company’s claims of an integrated R&D approach, offer little or no synergy/overlap with each other, in our view. We believe that the Company’s portfolio will continue to be streamlined in the coming years and would note that the Company is now operating under the oversight of Nelson Peltz, who established a position in 2013 and has stated publicly that DuPont would benefit from further simplification. Indeed, as we were putting the finishing touches on this year’s summer issue, Peltz’s firm Trian delivered a letter and ―white paper‖ summary to DuPont’s board calling for a breakup of the Company. Trian has recommended that DuPont separate its faster growing businesses including Agriculture, Nutrition & Health and Industrial Bio-Sciences from its slower growing cash generative businesses including Performance Materials, Safety & Protection and Electronics and Communications.
SYNGENTA
MONSANTO
DUPONT
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Trian’s Proposed Separation of DuPont - 2013 Sales by Segment
Source: The Wall Street Journal, Company data
In addition to his break up demands, Peltz hurled a number of criticisms at the underperforming
conglomerate taking particular issue with its bloated cost structure, disparate and overwhelming complexity, bureaucracy and lack of accountability, inefficient capital structure, and persistent conglomerate discount. Having spent a great deal of time in recent months here at AAF familiarizing ourselves with DuPont, we couldn’t agree more with Trian’s critique (at this point, we’ve only seen the letter and not the white paper). We believe that Peltz’s analysis of the situation is sound, however if we had to find fault with Peltz’s demands it would be that they could probably go much further. We believe that a breakup into more than two pieces would likely unlock further value over the long term and would note that there would still be 7 different business operating under the ―cash generating‖ company in Peltz’s plan, many of which have little to no overlap with each other (products would be wide ranging from Tyvek building wrap to TV and solar panel displays to Kevlar Fiber for body armor).
Business Description and Segment Overview During 2013, DuPont generated $36 billion of sales from its 13 business that are aggregated into seven
reportable business segments. DuPont conducts its operations globally and has a presence in more than 90 countries with total worldwide employment standing at ~64,000 as of December 31, 2013. Approximately 60% of the Company’s sales during 2013 were made to customers outside of the U.S. including 33% from developing markets. The following illustrates the Company’s sales and operating earnings by business segment:
Note: Segment Sales Presented Before Eliminations Note: Segment operating earnings are presented before $749 million of
corporate expenses and $423 million of significant items and exclude a $345 million loss in the Other segment
Industrial Biosciences $1,224, 3%
Nutrition & Health
$3,473, 10%
Performance Chemicals
$6,932, 19%
Performance Materials
$6,239, 17%
Agriculture $11,739, 33%
Safety & Protection $3,884 11%
Other $6, 0%
Electronics & Communication
$2,549, 7%
Performance Chemicals
$1,015, 16%Nutrition &
Health $299, 5%
Electronics & Communication
$334, 5%
Industrial Biosciences
$169, 3%
Performance Materials
$1,280, 20%
Safety & Protection $690, 11%Agriculture
$2,483, 40%
Total Segment Sales $36,046 MM Total Segment Operating Earnings $6,270 MM
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Recent Results – Agriculture Shortfall Prompts DuPont to Reduce Full Year Outlook In June 2014, DuPont reduced its second quarter and full year 2014 outlook for operating earnings per
share primarily reflecting weaker than expected performance in its Agriculture segment (33% of 2013 sales) and to a lesser extent its Performance Chemicals business, which accounted for 19% of 2013 segment sales. DuPont stated that its 2Q earnings would be moderately below the $1.28 a share (2Q EPS came in at $1.17 a share) recorded in the year ago quarter, while full year earnings would likely to be in the range of $4.00 to $4.10 a share compared with its prior outlook calling for $4.20 to $4.45 a share.
During 2Q 2013, operating earnings within the Agriculture segment came in below management’s expectations declining by 11% reflecting lower than anticipated corn seed sales (48% of segment sales) and higher than expected seed inventory write-downs. Corn seed sales were impacted by the shift to soybeans, which offered more favorable economics. While corn pricing also came in below management expectation, pricing was up versus the prior year due to strong demand for the Company’s new technologies including AQUAmax and AcreMax. DuPont was a beneficiary of higher soybean sales volumes (soybeans account for 14% of segment sales), although it was not enough to offset the decline in corn volumes. In addition, DuPont noted that since it is currently transitioning its soybean lineup to higher performing products it has not been able to fully participate in the strong soybean volumes. The Company’s crop protection business (30% of Agriculture segment sales) was negatively impacted during the second quarter by a wet spring, delayed and compressed application season and distributor destocking of elevated inventory levels. Despite the second quarter weakness, management expects its crop protection to post year over year growth on a full year basis during 2014.
Ag Business is DuPont’s Crown Jewel with Strong Competitive Position and L-T Growth Opportunities DuPont’s Agriculture business operations are conducted through DuPont Pioneer and DuPont Crop
Protection and focused on increasing crop yields and productivity. While we could spend multiple pages debating the environmental impact of genetically modified products (a market where DuPont is a major participant), the vast majority of organizations including the World Health Organization and American Medical Association, among many others, have surveyed the substantial literature on the topic and have found no evidence that GM foods are unsafe to eat.1
DuPont Pioneer is a world leader in developing, producing and marketing corn hybrid and soy bean varieties. Approximately 48% of segment sales are derived from the sale of corn seeds with 14% coming from soybean seeds. DuPont commands an approximate 17% market share in the global seed business trailing only Monsanto (~25% share). Notably, DuPont holds leading positions in the key markets of corn and soybean seeds (discussed in greater detail below). In addition to its corn and soybean seed sales, Pioneer also develops, produces, and markets canola, sunflower, sorghum, inoculants, wheat and rice. The Company’s crop protection business accounts for 30% of segment sales and includes well established brands of insecticides, fungicides and herbicides that offer insect, disease and weed control. Insecticides represent nearly half of crop protection sales and recent sales growth has been driven by Rynaxypyr, which is a product utilized on a broad range of core agricultural crops that was launched in 2008 and has recently achieved blockbuster status generating over $1 billion of sales during 2013. The following provides a further breakdown of Agriculture segment sales:
While the Company’s near term agriculture results are disappointing, this should not overshadow the significant progress the agriculture segment has made in recent years. Between 2008 and 2013, sales within the Agriculture segment increased at a 12% CAGR with segment operating margins expanding by 600 bps. During that time frame, the Company’s North America corn seed market share increased by 7 points (~5pts acquisitions and ~2pts organic) while its soybean seed share increased by 10 pts (~5pts acquisitions and ~5pts organic). Segment results were also aided by the strong results of the Company’s crop protection business.
Agriculture - Sales and Margin Performance
* Segment sales include transfers. ** Excludes non-operating pension/OPEB costs and significant items. Source: Company presentation, 2014
Notwithstanding recent headwinds, we believe the Agriculture segment should be able to sustain its recent momentum. During DuPont’s May 2013 Investor Day, the Company maintained its long-term revenue growth target for the segment at 8%-10%, but increased its operating margin target to a range of 22%-24% (up from 20%-22%). DuPont’s Agriculture business has a strong position in the attractive seed business that should experience good growth in the coming years thanks to new products and increased demand from developing markets. Meanwhile, the Company’s crop protection business has performed well and has a strong new product pipeline thanks to significantly higher R&D spending (up ~2x over the past 5 years). Below we provide a further analysis of our favorable view of the Company’s Agriculture segment.
Corn Seeds48%
Other Seeds
8%
Insecti-cides13%
Herbicides11%
Fungicides6%
Soybean Seeds14%
$6.5
$11.7
15%
21%
2008 2013
Sales ($B)* Operating Margins (%) **
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DuPont Well Positioned in Attractive Industry with Long-Term Tailwinds DuPont is well positioned in the global agriculture industry, which is expected to benefit from increased
global demand for agriculture products. The value of the global seed market is approximately $44 billion and is expected to increase at 12.1% CAGR to $85.2 billion by 2018 according to projections from industry researcher MarketsandMarkets. Meanwhile, the global crop protection market is slightly larger ($48 billion), but is expected to increase at a mid single-digit growth rate going forward and reach $71.3 billion by 2019 according to Transparency Market Research. The following table illustrates the major participants within each market.
FY 2013 Agrochemical and Seed Sales ($MM) Agrochemicals Seeds
Dow Chemical 5,638 Vilmorin* 1,914 Monsanto* 4,521 Dow 1,642
DuPont 3,522 KWS* 1,491 * Monsanto FY ends Aug. 31st, Vilmorin and KWS FY end June 30th. Source: Company reports, via seekingalpha.com.
A Closer Look at DuPont’s Seed Business The seed business is dominated by two participants, Monsanto and DuPont while the market for
agrochemicals is relatively less consolidated among the top companies. Below we provide additional detail about the Company’s seed business.
Strong Market Share – Within the key corn and soybean seed markets, there are just two companies that account for the majority of industry sales. The corn and seed markets are virtually a duopoly – DuPont and Monsanto have a 70% share of the corn seed market and control more that 60% of the Soybean seed business.
Market Share Trends in DuPont’s Key Seed Categories
Source: Cornland Consulting via Verdan Partners
It is worth highlighting that DuPont is the industry leader in both categories and has seen its share of corn seeds increase by 400 bps over the past 5 years to 36% while its soybean market share has increased over 800 bps to 34.7%. While corn and soybean seed sales account for the bulk of DuPont’s seed business, the Company also has strong market share positions in canola and sunflower seeds and is building advanced hybrid breeding technologies that should help it capture further share in rice and wheat.
Consolidating Industry – DuPont’s seed business, which accounts for 70% of its Agriculture segment sales, is well positioned in a consolidating industry. The top ten global seed companies currently control 75% of the market up from approximately 37% in 1995. Within the U.S., there are
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fewer than 50 companies marketing corn seeds (corn seeds account for nearly 50% of segment sales), down from approximately 300 companies in 1995.
The Biggest Corn Seed Companies Got Even Bigger in the Past Decade
Source: Context Network via Wall Street Journal
Going forward, most industry acquisitions will likely occur outside of the U.S, though we would not be surprised to see future consolidation occur among the industry’s leading participants. In June 2014, press reports surfaced that indicated that Monsanto and Syngenta had held preliminary merger talks. A combination of these two organizations would have created a company with market leading positions in both seeds and crop protection. Syngenta is the world’s largest maker of crop protection products while Monsanto is the largest seed player globally.
High Barriers to Entry – According to a recent study conducted by Phillips McDougall, the cost for the discovery, development and authorization costs of a new U.S. biotechnology trait introduced between 2008 and 2012 was $136 million. As we discuss in greater detail below, the R&D investment required to develop new products has created another entry barrier. During 2013, DuPont and Monsanto deployed $1.1 billion and $1.5 billion, respectively, on R&D.
Favorable Global Demographic Trends Should Benefit DuPont’s Agriculture Business According to DuPont, in order to grow enough food for expected long term population growth, food
production will need to double between now and 2050. As illustrated in the following chart, the growth of the middle class is expected to increase from 1.9 billion today to 3.25 billion in 2020 and nearly 5 billion by 2030.
Emerging Middle Class (Billions)
Source: Company presentation, 2014
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The growing middle class, especially in emerging markets will result in a significant increase in the demand for agriculture products as rising living standards are accompanied by diet changes including an increase in meat consumption. According to data from the USDA, three kilograms of feed (corn, soybean meal, etc.) are required to produce 1 kg of meat. Over the next decade, developing markets are projected to account for a large majority of the increase in world agricultural consumption and imports. Specifically, emerging markets are expected to account for approximately 80% of the increase in the global consumption of meat and 83% of the increase in the demand for grains and oilseeds.
North America Latin America Europe World Asia Africa
Source: Company presentation
While DuPont’s Agriculture segment currently generates just 8% of its sales from Asia Pacific, the region will likely account for a disproportionate amount of future segment growth. China is expected to be a strong driver of the increased agricultural demand forecast in the coming years. While past forecasts calling for increased demand for livestock and feed grains in China have proved overly optimistic, recent developments including increased urbanization and rising living standards are spurring demand for meat production and consumption in China. According to the USDA, up until the late 20th century, the Chinese population received over 90% of calories from carbohydrates such as rice, wheat, millet, beans and tubers. However, this has begun to change given increased meat consumption experienced in recent years.
Continued Growth Projected in China’s per Capita Meat Consumption
Source: USDA Production, Supply and Distribution database and projections
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According to projections from the USDA, China’s urbanization rate recently surpassed 50%, and is expected to increase to over 63% over the next decade. In addition, tightening rural labor markets, disease problems and other factors have shifted China’s livestock sector away from family farming to larger operations that demand commercial feed helping to drive an increase in grain exports.
China’s Net Imports of Grains Surged During 2012-13
Note: Net Imports=imports-exports. Data for calendar years. * DDGS=Distillers Dried Grains with Solubles Source: USDA, Economic Research Service analysis of China Customs statistics.
As a result of these developments, China is expected to account for 40% of the rise in global corn trade over the coming decade. While corn and soybean prices (for the commodity not the seed) currently remain under pressure, long term demand from China should help support commodity prices in the coming years. China’s combined use of corn and soy meal for animal feed is expected to rise from 200mmt (million metric tons) to over 300 mmt over the next 10 years. The following charts illustrate import trends within China’s corn and soybean markets:
China Will Continue to be Dominant Global Soybean Importer
China Expected to Become Largest Global Corn Importer
Source: USDA Production, Supply and Distribution database and projections
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Agriculture R&D Investment Has Produced Strong New Products and Robust Pipeline
“Despite the normal year to year ebbs and flows in grain stocks, planted area and local product performance, our ability to continue to innovate will be the force that drives our growth.”
– Jim Borel EVP DuPont, on preannouncement call June 2014
As part of DuPont’s ongoing transformation, the Company has also allocated a disproportionate amount of its R&D investment to areas with the greatest potential. Although DuPont’s overall level of R&D spending increased by approximately 50% between 2007 and 2012, spending on Agriculture R&D nearly doubled over that same time frame. During 2013, DuPont spent $1.1 billion on R&D representing ~10% of segment sales and representing a slight increase from 2012 levels.
R&D Investment Profile* ($B)
* Restated to include allocation of corporate R&D spend to segments.
Source: Company presentation
While we provide a further discussion of the Company’s R&D investment below, we note that the Company intends to introduce 4k new food related products from its Agriculture and Nutrition & Health business by 2020. In our view, DuPont has a very high value, high potential pipeline to help meet the growing demands for food globally. Below we provide a few details on DuPont’s new products/pipeline within its seeds and crop protection businesses.
Seeds (70% of 2013 Ag Segment Sales) – DuPont stated at its 2013 Investor Day that approximately 15% to 20% of its seed offerings are new each year. The Company’s new products are introduced to deliver improved yield or durability and often are replacements for previous products. At present, DuPont’s corn seed products containing above ground and below ground insect protection represent about a third of DuPont’s sales in North America. However, DuPont’s DP 4114 is a late stage product that will be able to extend above and below ground insect protection to over half of its corn seed product mix. DuPont recently received cultivation approval for DP 4114 in the U.S. and Canada and is continuing to pursue registration approval for the product in key import countries. DuPont believes the product could be commercialized during the second half of this decade and generate peak annual sales in excess of $500 million. The Company recently launched Optimum Leptra in the U.S. during 2014 and management expects that the product will be launched in Brazil pending regulatory approval. DuPont’s Leptra corn hybrids will provide farmers with an additional tool to manage lepidopteran pests and the product also boasts an over $500 million revenue opportunity. Within the Company’s soybean lineup, Phlenish High Oleic Soybeans (Plenish has no trans fat, less saturated fat and the highest amount of heart-healthy monounsaturated fat available in soy) have recently been launched and the product has received regulatory approval in markets that represent more than 90% of U.S. Soybean exports. DuPont expects its Plenish soybean product to ultimately become a $100-$500 million product at maturity.
R&D Phase: D=Discovery, 1=Proof of Concept, 2=Early Development, 3=Advanced Development, 4=Pre-Launch, Launch=Available for commercial sale or use. Products, concepts, or benefits described herein will not be offered for sale or distribution until completion of field testing and applicable regulatory reviews. Each Phase represents only the lead event for each program. Discovery and market evaluation is an ongoing process for all traits and programs in the pipeline. (2) Estimated peak sales range provided for projects Phase 3 or later in pipeline: L=$0-100MM, M=$100-500MM, H=$500MM+ (3) Market Opportunity reflects estimated total acres in Primary Markets in millions. Indicates advancement or addition (2/13-2/14).
Source: Company presentation, 2014
Crop Protection (30% of Ag Segment Sales) – DuPont currently boasts one of the most productive R&D pipelines in the crop protection industry. As a testament to the Company’s strong product pipeline, DuPont received the best R&D Pipeline Award during 2013 by Agrow Awards. DuPont hopes to build on the success of its recent blockbuster crop protection product Rynaxypyr, which was only launched in 2008 and achieved blockbuster status during 2013 after achieving annual sales of over $1 billion. Within the disease control category, DuPont recently launched Picoxystrobin, which is expected to generate more than $400 million in peak annual sales. In addition, there are a number of promising products in the disease control pipeline including Penthiopyrad and Zorvec.
Monsanto Agreement Provides Access to Monsanto Technology In 2012, DuPont entered into a licensing agreement with Monsanto giving it access to key Monsanto
seed technology. While the agreement was not inexpensive ($1.75 billion in royalty payments over several years), DuPont is now able to incorporate Monsanto’s technology for the development of new agricultural seed products. As part of the agreement, the companies agreed to drop anti-trust patent claims against each other and a $1 billion verdict in favor of Monsanto was voided. According to the terms of the agreement, DuPont is required to make a series of upfront and variable payments subject to Monsanto delivering enabling soybean genetic material. Expected total annual fixed payments in the aggregate of $802 million will come due in years 2014-2017. In addition, beginning in 2018, DuPont will pay royalties on a per unit basis related to two of Monsanto’s seed traits (Roundup Ready 2 and dicamba tolerance) for the life of the license subject to annual minimum payments through 2023 totaling $950 million. While Monsanto receives a recurring revenue stream, DuPont was able to convert a $1 billion legal liability into royalty payments that give it access to key technology it can incorporate into future products.
Capitalizing on Valuable Farm Data Could Drive Subscription Revenues and Boost Demand In February 2014, DuPont announced that it would be launching a suite of products under the Encirca
banner as part of an initiative to become a major player in the so-called ―precision agriculture‖ industry. Basic services through the Encirca platform can be accessed free of charge via a mobile application, allowing farmers and DuPont agents to record and share crop information. In addition to the free offering, the Encirca View product is a fee-based product ($150 per month after $450 initial set up fee) that includes market news and
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analysis, grain trading capabilities and location specific weather conditions. Another fee-based product, Encirca Yield, will help farmers by providing recommendations on seeds, chemical applications and water usage and is priced at a per/acre rate (~$10-$20 per acre). The precision agriculture industry is expected to be a $3.7 billion industry by 2018 and DuPont is targeting annual revenues in excess of $500 million by the beginning part of the next decade. DuPont is offering the data services through local Encirca Certified Service agents, who will work directly with farmers to analyze and tailor recommendations based on individual needs and priorities. DuPont has entered into relationships with a number of entities including DTN/The Progressive Farmer, Deere, the USDA and University of Missouri to bolster its service offerings. Early response to the product has been favorable and DuPont noted that it has achieved its initial targets following the recent launch.
DuPont’s Non-Agriculture/Performance Chemicals Business Segments Following the separation of performance chemicals business in mid-2015, the non-agriculture segments
will account for 60% of sales and nearly 50% of operating earnings. Each of these businesses boasts strong market positions. This can be seen in the strong margin profile of the segments with 4 out of the five segments posting double-digit operating earnings during 2013. DuPont’s long-term targets call for all five segments to generate double-digit operating earnings margins with the individual segment targets ranging from 12% to 23%. The following table summarizes recent performance of these businesses and provides DuPont’s long-term targets for sales and operating margins.
Segment Summary and DuPont Long-Term Targets - Excludes Agriculture and Performance Chemicals
Operating Earnings exclude non-operating pension/OPEB costs and significant Items. Target: Initially Communicated at DD's May 2013 Analyst Day
Below we provide an overview of DuPont’s non-Agriculture and Performance Chemicals business segments:
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Electronics & Communications The Electronics & Communications (E&C) segment is a leading supplier of enabling materials and
technologies for solar energy (photovoltaics), consumer electronics, flat panel displays, advanced printing and other industrial electronic applications worldwide. Photovoltaics (PV) accounts for 33% of segment sales and boasts a number of good growth opportunities thanks to increased demand for solar energy in the U.S., China and developing countries coupled with solar’s low market share (less than 1% of global electricity is from solar). DuPont projects that the market for Photovoltaic material will increase at a ~15% rate going forward. Other attractive markets within E&C include consumer electronics (23% of segment sales), which is benefiting from the growth in smartphones and tablets. Display materials products currently represent just 2% of segment sales, but could become a strong contributor to future growth thanks to DuPont’s proprietary organic light emitting diode (OLED) process technology and a growing suite of high-performance solution-based materials that will enable display manufacturers to deliver superior OLED device performance with lower manufacturing costs for large-format displays. The cost of manufacturing a TV with OLED is 30% less than the current LCD manufacturing costs and nearly 50% less than equivalent evaporated panels. DuPont is poised to capture two revenue streams from OLEDs including licensing revenue and material sales. OLED TVs are expected to begin shipping in 2015 with 27 million units projected to be sold by 2018. DuPont estimates that if OLEDs are able to capture 10% of the TV market it would represent a $2 billion opportunity for the sale of its proprietary materials.
Nutrition & Health This segment’s products include a wide range of DuPont Danisco food ingredients such as cultures and
notably HOWARU probiotics, emulsifiers, texturants, natural sweeteners such as Xivia, and Supro soy based food ingredients. The Company’s solutions allow food formulations to be healthier through the reduction of sugar, fat, and salt or including products that actively promote digestive or immune health, such as probiotics or soy protein made with patent pending technology delivering critical value for beverage applications in sports performance, weight management and clinical nutrition. The Nutrition & Health segment also includes diagnostic solutions, which help to identify the presence of food-borne pathogens. In our view, DuPont’s Nutrition & Health segment benefits from meaningful competitive advantages including its 22 global food application centers that help address region-specific food reformulation needs. DuPont’s strong competitive position can be seen in its leading market positions across its product portfolio. Notably DuPont boasts the number 1 or number 2 position in each of its product segments.
Nutrition &Health Boasts Broad Product Offering with #1 or # 2 Share Position
Source: Company presentation, November 3013
During 2013, DuPont launched a family of probiotics targeted for children, adults and sports enthusiasts. The HOWARU probiotic is available to dietary supplement and food and beverage manufacturers focused on improving consumer health. Probiotics are clinically documented to maintain natural immune defenses. HOWARU products for kids reduced the duration of respiratory symptoms (lower antibiotic use and sick days)
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while the HOWARU adult product demonstrated a 27% reduction of risk of respiratory tract illness. The global retail market for probiotics is estimated at $32 billion in 2013 and is expected to increase to $45 billion in 2018.
Industrial Biosciences Activities within this segment consist of developing and manufacturing a broad portfolio of bio-based
products. The segment utilizes biotechnology on an industrial scale to deliver market-driven innovations that improve performance, productivity and reduce environmental footprints for its customers and end users. During 2013, Industrial Biosciences derived 79% of sales from enzymes and related products and 21% from biomaterials. The segment’s enzymes add value and functionality to processes across a broad range of markets such as animal nutrition, detergents, food manufacturing, ethanol production and industrial applications. For example, the Company’s detergent enzymes facilitate cold water washing (reduced energy use) while DD’s baking enzymes improve the texture and extend the freshness of baked goods. Renewably sourced biomaterials (typically an alternative for petro based products) provide enhanced performance and sustainability for carpeting, fabrics, cosmetics and industrial fluids.
The increased use of alternative fuels could be a major driver of future growth within the Industrial Biosciences segment. To capitalize on the future demand, DuPont is constructing a cellulosic ethanol facility (~$200 million investment) that is expected to be completed during the second half of 2014. The DuPont facility will be among the first and largest commercial scale biorefineries in the world and is expected to produce 30 million gallons of cellulosic ethanol (note: cellulosic ethanol is produced from low-cost sustainable inputs including agriculture residue (such as stover) and energy crops). During DuPont’s 2013 Investor Day, management noted that ―Based on the demand projection, we’re going to need a substantial number of new cellulose-based plants to be built. DuPont’s strategy is not to build or invest into these facilities, but we do intend to be the technology inside most of them.‖ DuPont is expected to generate three revenue streams from cellulosic ethanol if the technology moves forward including licensing (engineering and design technology), supplying enzymes and fermentation microbes, and from the sale of fuel.
Safety & Protection The Safety and Protection segment is comprised of three businesses including Protection Technologies,
Sustainable Solutions and Building Innovations. The segment delivers products and services to a large number of markets including construction, industrial, automotive, consumer, military and law enforcement. Key brands include Kevlar (high strength material), Nomex (thermal resistant material), Tyvek (protective material), Sontara (spunlaced product), and Corian (solid surfaces).
Performance Materials The Performance Polymer segment provides its customers with innovative polymer science solutions
and expert application development assistance to enhance the performance, reduce the total system cost and optimize the sustainability of their products. Key markets served by the segment include auto OEMs and associated after-market industries, as well as electrical, packaging, construction, oil, electronics, photovoltaics, aerospace, chemical processing and consumer durable goods.
Growth Drivers New Products
“Our R&D investments are the engines that drive our sustainable top-line growth. We have a number of metrics and are continuing to drive the connectivity between these metrics and the bottom-line they create. The new products that come from these investments open new markets, bring us market share gain, and improve margins.”
– DuPont CEO Ellen Kullman, during the Company’s 2013 Investor Day
DuPont has a long and successful history of developing and commercializing innovative products, materials and services. Recognizable examples that have been derived from the Company’s R&D efforts include Kevlar (1965), Tyvek (1967), and Lycra (1949 and sold to Koch in 2013). More recently, DuPont’s commitment to science and innovation is illustrated by its new product development. During 2013, DuPont generated $10.1 billion of sales from new products (those introduced within previous 4 years) representing nearly 30% of the Company’s total including $5.8 billion of new product revenue from its Agriculture & Nutrition
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business, $0.4 billion from bio-based industrials and $3.9 billion from advanced materials businesses. Importantly, new products have a number of benefits including opening up new markets, boosting market share gains and improving margins.
DuPont - New Products Commercialized
Emerging Markets
Sales from developing markets represented 33% of DuPont’s revenue in 2013 and the Company’s growth plans include focusing on expanding its presence in developing markets. During 2013, sales derived from emerging markets increased by 7%, well above the 3% growth experienced in its developed markets. Importantly, the margins generated in emerging markets have been increasing, and DuPont notes that they are currently about equal to margins from developed markets. In order to continue to benefit from emerging markets, DD has added ~9,000 local employees over the past four years to bolster its sales force and application development capabilities in countries like Vietnam, India, Indonesia, Russia and the Ukraine. In addition, DuPont has opened 12 innovation centers around the world over the past 2-3 years to help spur new product growth. The vast majority of these centers are located in emerging markets in order to help develop products that meet the needs of specific markets. DuPont believes that the ability to address the local needs of its customers is a competitive advantage for the Company.
Favorable Macro Trends We believe that DuPont will be a beneficiary of a number of long-term macro trends including global
population and economic growth. Global population growth will likely be accompanied by an expansion of the middle class that will demand more and safer food favorably impacting the Company’s Agriculture and Nutrition & Health segments. Meanwhile, ongoing global economic growth will drive demand for housing and automotive industries, which are two important end markets for many of DuPont’s business segments.
901
1,451
1,786 1,742
2,047
1,753
0
500
1,000
1,500
2,000
2,500
2008 2009 2010 2011 2012 2013
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Cost Reductions and Further Simplification Potential
“So, DuPont is a conglomerate. It's a complex business, and we are always trying to simplify businesses, because simple businesses grow faster. Complex businesses don't. And that's what needs to be done at DuPont. And we will know some time before the middle to the end of the summer whether these conversations have been constructive or not.”
– Nelson Peltz (DuPont Shareholder and Activist Investor) July 16, 2014
In conjunction with its June 2014 preannouncement that full year 2014 earnings would come up short of its previous expectations, DuPont announced that it would be implementing an initiative to reduce costs by $1 billion on an annual basis by 2019. The latest initiative is the most aggressive cost reduction plan under CEO Kullman’s watch and DuPont expects to achieve about two-thirds of the savings by the end of 2015 (note: about one-third of total savings reflect the absence of costs associated with the separation of its Performance Chemicals business, which is expected to be completed in mid-2015). The remaining third of savings are expected to be derived from improving productivity across all of its business functions as DuPont builds out its SAP system to accommodate new business process systems. During 2Q 2014, DuPont took a $263 million pre-tax charge, which included $163 million in employee separation costs across all of its business segments. DuPont expects to incur future charges as it implements additional actions associated with the cost reduction initiative. While management is targeting $1 billion in reductions, we would not be surprised if the Company exceeded its target. During DuPont’s June preannouncement call CEO Kullman stated, ―… I think the $1 billion is what we’ve defined now and I think there’s going to be more to come.‖ The following provides an illustration of the Company’s trend in corporate expenses (excludes coatings), which increased following the 2011 acquisition of Danisco. In addition to individual business unit cost reductions, corporate expense reductions and reduced losses in the ―Other‖ segment (DuPont reported a segment operating deficit of $345 million in its Other segment in 2013) are likely to be sources of significant future savings.
DuPont - Corporate Expenses ($MM)
Note: Represents total corporate expenses excluding significant items and estimate of Dupont Performance Coatings residual costs.
The latest cost reduction plan follows on the heels of two recent cost savings initiatives. During 2013, DuPont realized $300 million in pre-tax cost savings following the sale of its Performance Coatings business in 2012. DuPont expects to ultimately realize $450 million of savings under the initiative intended to increased productivity, enhance competitiveness and accelerate growth by reducing corporate cost previously allocated to the Coatings segment as well as from the reduction of costs from the Company’s other business segments. Between 2009 and 2012, DuPont delivered more than $2.2 billion of fixed cost savings and another $2.6 billion
$628
$543 $558
$650
$738 $749
2.4% 2.4%
2.0%
1.9%
2.1% 2.1%
1.5%
2.0%
2.5%
3.0%
$-
$100
$200
$300
$400
$500
$600
$700
$800
2008 2009 2010 2011 2012 2013
% o
f Sa
les
Co
rpo
rate
Exp
en
ses
($M
M)
Corporate Expenses % of sales
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in working capital productivity (both figures are cumulative amounts) that have more than offset inflation and helped fund growth initiatives including the Danisco acquisition.
Trian/Peltz Oversight Likely to Lead to Further Streamlining and Shareholder Friendly Initiatives
“You’ve got to earn the right to be a conglomerate …The individual businesses need revenue growth similar to or better than their standalone competitors, and their margins better be best in class.”
– Nelson Peltz in Bloomberg Business Week Article “Predators Are Good for Stocks”2
In August 2013, an SEC filing revealed that Trian, a firm run by activist investor Nelson Peltz, had made an investment in DuPont (5.8 million shares). Subsequent to the Peltz disclosure, DuPont announced in October 2013 that it would be spinning off its Performance Chemicals business. We do not believe the move was a coincidence and suspect that management’s decision was based on input (or nudging) from Peltz who recently stated that DuPont’s decision to separate its Performance Chemicals business was a great move. Despite the recent moves to streamline its operations, the Company’s actions have not gone far enough to unlock shareholder value and appease Peltz & Co., who recently called (on September 16) for a breakup of the Company. The Trian announcement came after the Company’s June preannouncement that it would fall short of its full year outlook, the third consecutive year it has failed to achieve its projections.
In Peltz’s letter to DuPont’s Board, he pointed to the Company’s bloated cost structure as a reason to separate the conglomerate and estimated that the there are $2 to $4 billion of excess corporate costs including $1 billion of unallocated corporate expenses. Among these unallocated expenses are maintenance expenses for a country club, theater and hotel. While the estimate of excess corporate expenses may be aggressive, a recent Peltz anecdote helps to illustrate the Company’s excessive cost structure. In July 2014, Peltz noted that following DuPont’s sale of its Performance Coatings business (completed February 2013), DuPont management stated that it had sold the business to Carlyle for~12.5x EBITDA. Meanwhile, according to Peltz, Carlyle claimed in its presentation to bankers that it had acquired the business at a 6.5x multiple. Peltz noted that both entities’ statements were accurate with the difference being the amount of corporate overhead DuPont attributed to the unit that Carlye didn’t need.3 In our view, the presence of an activist investor who has a strong track record in unlocking shareholder value, should provide investors reason to be hopeful that further value enhancing initiatives could be on the horizon.
Balance Sheet and Financial Position – Chemicals Separation Should Boost Financial Flexibility DuPont maintains a strong balance sheet with cash and investments of $4.3 billion as of the second
quarter of 2014 and net debt of just $7.5 billion, translating into a leverage ratio (net debt/EBITDA) of just 1.2x. Total debt at the end of the second quarter stood at $11.8 billion and near term maturities are modest with just $4.4 billion coming due over the next four years, with the balance maturing beyond 2018. DuPont is committed to maintaining a strong financial position and its long-term bonds are currently rated A and A2 by Standard & Poor’s and Moody’s, respectively. In early 2013, DuPont received ~$4 billion in after-tax proceeds from the sale of its Performance Coatings business. DuPont utilized roughly $3 billion of the proceeds to reduce its debt. DuPont’s decision to pay down debt reflected the fact that rating agencies were penalizing the Company for its unfunded pension and other benefits liability coupled with its desire to maintain its A/A2 credit rating. At year-end 2012, the Company’s pension benefits and other benefits were underfunded by $13.3 billion, though the liability declined to $8.4 billion at the end of 2013. Management attributed half of the pension/benefits reduction to the discount rate with the other half due to a combination of strong returns on plan assets and OPEB plan adjustments. DuPont made approximately $500 million in contributions to its primary U.S. plan during 2012; there were no contributions made in 2013 and the Company does not plan to make any payments during 2014. The Company did make $313 million of contributions to its non-U.S. pension/benefit plans in 2013 and expects to make $344 million in contributions to these plans in 2014.
2 http://www.businessweek.com/articles/2014-04-03/activist-investors-are-good-for-the-stock-price 3 Nelson Peltz: ―Let me tell you about DuPont‖ Link to video: http://video.cnbc.com/gallery/?video=3000293276
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Chemical Spinoff Will Likely Bolster DuPont’s Already Strong Balance Sheet
“The spin will generate a lot of cash internally as well because as we put the debt load on the spun entity, we would look to dividend back that cash to DuPont and so the spin itself will have a significant amount of cash inflow to the Company as well.”
– Nick Fanandakis, DuPont CFO, during May 2014 Investor Conference
While DuPont’s soon to be spun off Performance Chemicals business is a cyclical business, management notes that it is able to generate returns above its cost of capital. In addition, the business boasts limited capital intensity (capex as a % of revenues has averaged ~5%, in line with Company averages) and it does not have large R&D requirements with an average of just $120 million spent over the past three years. DuPont is targeting a low investment grade (BBB) rating for the spinoff, though nothing has been finalized. Based on our projections, we estimate that the performance chemicals unit could handle upwards of $5 billion of debt (representing a leverage ratio of 2.5x-3.0x), which would represent over 40% of DuPont’s current total debt amount). While 2013 EBITDA for the Performance Chemicals unit was cyclically depressed and reported at just $1.2 billion, it should be noted that segment EBITDA has averaged $1.9 billion over the past three years. Even if management were to err on the conservative side and base the amount of debt the business could support based on 2013 results, the spinoff would still likely be able to support $3 billion of debt, in our view. DuPont also has the opportunity to offload some of its underfunded pension liabilities to the spin off, but recent comments by management to offload debt or pension liabilities will be an either/or decision (weighing debt or pension liability). While the Company’s pension is currently a liability, it could become an asset in the coming years especially if interest rates rise from multi-decade low levels. Management has noted that its pension was an asset as recently as 2007 when discount rates were higher.
Returns to Shareholders Set to Accelerate Following the separation of Performance Chemicals, we would not be surprised if the Company
accelerated its returns to shareholders by taking advantage of its robust balance sheet and increased financial flexibility. As we noted above, DuPont will have significant balance sheet flexibility following the spinoff. In January 2014, DuPont authorized a $5 billion buyback and stated that it expects to repurchase $2 billion during 2014 and the remainder over time. Through the first half of 2014, DuPont had repurchased $1.1 billion of its shares (16.6 million shares; average cost: $64 a share).
While the cash generative Performance Chemicals business will likely assume a large portion of DuPont’s current dividend, we would expect DuPont to continue to show a strong dividend commitment. DuPont has been paying quarterly dividends continuously since 1904 and did not suspend or decrease its dividend during the recent financial crisis. In August 2014, DuPont announced a 4% increase in its dividend, representing the third increase in the past 27 months.
Valuation and Conclusion We do not believe DuPont’s current valuation reflects its crown jewel Agriculture business and various
other business that have market leading positions with good future growth opportunities. At current levels, DuPont trades at 10.7x TTM EBITDA. However, adjusting for normalized profitability of the Company’s performance chemicals spinoff, we estimate that shares are trading at 9.7x TTM EBITDA. We would also note that the Company recently committed to a $1 billion annual cost reduction initiative and expects to realize three quarters of the savings by the end of 2015. Adjusting for these expected savings would further reduce the Company’s multiple by about another full turn.
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DuPont’s Long-Term Sales and Margin Targets
* Excludes non-operating pension/OPEB costs and significant items. Source: Company presentation, May 2014
In determining our valuation for DuPont, we have valued the Company’s agriculture business at 12x our
projected 2016E EBITDA. We forecast that DuPont’s revenues and operating margins approach the low end of DuPont’s long term targets (see appendix). We believe this is a conservative assumption especially since the Company communicated its long-term target before the recently announced $1 billion cost reduction initiative. We believe this multiple is appropriate as it represents a discount to publicly traded peer Monsanto. While Monsanto warrants a premium reflecting its more attractive seed portfolio, we would note that DuPont arguably has a superior crop protection business. DuPont’s crop protection business is less commodity price dependent and is more diversified by geography and product type (corn, soybeans, fruits, vegetables, etc.). We believe that our view is somewhat reinforced by press speculation that Monsanto was recently reportedly interested in acquiring Syngenta, ostensibly for its crop protection business. In September 2014, FMC announced that it would be acquiring Cheminova for approximately $1.8 billion. The deal values Cheminova at 11.7x trailing EBITDA and roughly 11.1x forward EBITDA and provides a good comp for crop protection businesses, in our view.
DuPont Agriculture $2.4 21.4% Note: TTM EBITDA for DuPont Agriculture assumes allocation of 35% of corporate expenses
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We have valued DuPont’s non Agriculture/Performance Chemicals businesses at 9x our projected 2016 EBITDA amount for these businesses. We believe this multiple is conservative as it represents a discount to the current trading valuation of a group of peer companies that compete with its various businesses at a similar margin profile. Similar to the projections we applied for the Agriculture segment, we have assumed that sales and margins approach the low end of the Company’s targeted range. We believe this likely underestimates the potential profitability of these businesses especially with significant segment cost reductions on the horizon.
Our estimate of DuPont’s intrinsic value is $89 a share, representing 35% upside from current levels.
We believe that additional upside could occur from a number of different sources including further simplification of DuPont’s business, accelerated share repurchases thanks to DuPont’s robust balance sheet, and greater than anticipated global growth favorably impacting prospects within the Company’s various segments.
DuPont - Estimate of Intrinsic Value
Value ($MM)
Agriculture @ 12x 2016E EBITDA $38,757 DuPont's Non-Agriculture Business @ 9x 2016E EBITDA $36,339 Peformance Chemicals @ 7x 3YR Average EBITDA $13,050 Corporate Expenses @ 8x 2016E Amount ($2,492) 2016 E Net Cash (Debt) ($1,333) Environmental Liability (2013 Amount) ($458) Pension Liability @ 50% of 2013 Amount ($4,215) Equity Value $79,648
2016E Shares Outstanding 899
Estimate of Intrinsic Value (Per Share) $88.63
Implied Upside to Intrinsic Value Estimate 34.6%
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Overview of Other Valuation Assumptions: Performance Chemicals – We have valued the Performance Chemicals segment at 7x the
business’ 3 year average trailing EBITDA and assumed that the unit is separated in mid-2015 with a $3 billion dividend to DuPont. We believe this is conservative and would not be surprised if the amount of the dividend is larger. While the business is volatile, it does generate good cash flows and management has noted that even at trough cycle levels it is able to earn returns above its cost of capital.
Corporate Expenses – assumed corporate expenses decline nearly 40% between 2013 and 2016 to $462 million from $762 million in 2013. We would not be surprised if this is conservative especially with heightened oversight from Peltz & Co.
Share Repurchases – We’ve assumed that DuPont repurchases approximately $4.5 billion of shares over the next three years, just under its current authorization amount. We would note that following the spinoff, DuPont will likely have significant flexibility to accelerate share repurchases so this amount could prove conservative.
Pension Liability – Our valuation assumes a reduction to the currently underfunded pension plan. We have valued the liability at 50% of its 2013 amount. We believe that this is a conservative approach and would note that this liability could become an asset in a rising interest rate environment.
Risks Risks that DuPont may not achieve our estimate of the Company’s intrinsic value include, but are not
limited to, inability to complete the upcoming spinoff of its Performance Chemicals business, unanticipated weakness in key markets including agriculture, automotive and housing, among others, an uncertain global economic environment, failure to develop and commercialize new products, greater than anticipated environmental liabilities associated with current or legacy operations, and increased consumer back lash against genetically modified products.
Analyst Certification Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal
views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our analysts’ compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this report.
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E. I. DU PONT DE NEMOURS AND COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, Dollars in millions)
ASSETS June 30, 2014 Dec. 31, 2013 Current assets
Cash and cash equivalents $ 4,174 $ 8,941 Marketable securities 173 145 Accounts and notes receivable, net 8,896 6,047 Inventories 6,940 8,042 Prepaid expenses 252 206 Deferred income taxes 894 775 Assets held for sale — 228
Total current assets 21,329 24,384 Property, plant and equipment, net of accumulated depreciation 13,035 12,993 Goodwill 4,686 4,713 Other intangible assets 4,885 5,096 Investment in affiliates 982 1,011 Deferred income taxes 2,420 2,353 Other assets 977 949 TOTAL ASSETS $ 48,314 $ 51,499 LIABILITIES AND EQUITY Current liabilities
Accounts payable $ 3,542 $ 5,180 Short-term borrowings and capital lease obligations 2,506 1,721 Income taxes 763 247 Other accrued liabilities 4,228 6,219
Total current liabilities 11,039 13,367 Long-term borrowings and capital lease obligations 9,292 10,741 Other liabilities 9,931 10,179 Deferred income taxes 924 926 TOTAL LIABILITIES 31,186 35,213 Commitments and contingent liabilities Stockholders’ equity
Preferred stock 237 237 Common stock, $0.30 par value 301 304 Additional paid-in capital 11,168 11,072 Reinvested earnings 17,572 16,784 Accumulated other comprehensive loss (5,453) (5,441) Common stock held in treasury, at cost (6,762) (6,727)
Total DuPont stockholders’ equity 17,063 16,229 Noncontrolling interests 65 57 TOTAL EQUITY 17,128 16,286 TOTAL LIABILITIES AND EQUITY $ 48,314 $ 51,499
Asset Analysis Focus is not an investment advisory bulletin, recommending the purchase or sale of any security. Rather it should be used as a guide in aiding the investment community to better understand the intrinsic worth of a corporation. The service is not intended to replace fundamental research, but should be used in conjunction with it. Additional information is available on request. The statistical and other information contained in this document has been obtained from official reports, current manuals and other sources which we believe reliable. While we cannot guarantee its entire accuracy or completeness, we believe it may be accepted as substantially correct. Boyar's Intrinsic Value Research LLC, its officers, directors and employees may at times have a position in any security mentioned herein. Boyar's Intrinsic Value Research LLC Copyright 2014.
