Sunday 17 December 2017

Fortune favours the brave, like Du Pont

Stock market analysis
Stock market analysis

Dr John Lynch

ONLY the bravest companies choose to re-invent themselves and only the very bravest will offload divisions that contribute a third of their profit base as part of the reform. On top of that, management needs a lot of courage to tell the world that it is switching to a strategy of high growth, high margins and the strict avoidance of sectors with volatility. But this is exactly what the company we are examining today has done. It is the Du Pont Corporation and we can believe all its rather grandiose claims because it has successfully done the same in the past.

Du Pont is one of the great 20th-century inventors. It has been at the forefront of some of the most innovative products of the past 100 years. It has products like Nylon, Teflon and Lycra to its name. It can even claim to be the inventor of the bullet-proof vest.

Now it has told investors it is focusing its scientific capability on agriculture, advanced materials and industrial bioscience – and for a company employing 10,000 scientists in 150 locations it is hard to doubt its chances.

The company is over 200 years old. It was the brain-child of EI Du Pont, a refugee from the excesses of the French Revolution who brought gunpowder expertise to the state of Delaware and boomed. Du Pont supplied half of all gunpowder used by the Union Army in the American Civil War.

Knowing a bit about powering weapons was never going to be a wasted skill in the 20th Century and through two world wars, a cold war and a space race, Du Pont continued to set the profitability bar ever higher. Today, the company is the largest US chemical company by market capitalisation, $58bn (€42bn), employing 70,000 people.

Since the beginning of this century, Du Pont has been signalling a change in strategy. As a result, in 2004, the company sold its famed textile business including well known brands like Lycra and Dacron.

However, it is in the last two years the 'repositioning strategy' has accelerated. It has offloaded its coating and chemical divisions, which accounted for a considerable 30pc of its 2011 sales. The performance coating division fetched $4.9bn of which $1bn will be used for its share buy-back programme. The chemical division exits to a new company owned by the Du Pont shareholders.

These asset sales have not pleased everyone. Some critics complained the group was jettisoning its cash generators. But in Du Pont's opinion these divisions were volatile, cyclical and low margin.

At the same time, the company has acquired two new companies, Solea and Danisco. The latter, a Danish company producing food ingredients and enzymes, cost $6bn. By integrating Danisco into existing Du Pont divisions, management have created a world-class nutrition and industrial bioscience division. In 2012, the company assumed complete control for Solae, a soy protein food company.

As might be expected, research and development is fundamental to Du Pont. Since 1802, it has registered 38,000 patents and it commits 6pc of its sales revenues to research, more than any of its rivals.

Du Pont's sales totalled $36bn in 2013, up 2.7pc on the previous year.

Its share price is $60, just below its all-time high of $65 last year, and has a chunky price-to-earnings ratio of 20. The positive side to the new strategy is that new products developed over the last four years provided a record 30pc of last year's sales. Maybe offloading low-margin divisions was not such a bad idea after all.


Irish Independent

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