ModernGraham Valuation: Du Pont (DD)

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Company Profile (obtained from Google Finance): Dupont E I De Nemours & Co, formerly E. I. du Pont de Nemours and Company, manufacturing, seed production or selling activities and some are distributors of products manufactured by the Company. The Company’s segments are Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection and Pharmaceuticals. During the year ended December 31, 2011, the Electronics & Communications segment completed the acquisition of Innovalight, Inc., a company specializing in advanced silicon inks and process technologies that increase the efficiency of crystalline silicon solar cells. As of September 22, 2011, it acquired Danisco A/S (Danisco), a global enzyme and specialty food ingredients company. In May 2012, it acquired from Bunge full ownership of the Solae, LLC joint venture. In February 2013, the Company sold DuPont Performance Coatings.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

MG Value $96
MG Opinion Undervalued
Value Based on 3% Growth $56
Value Based on 0% Growth $33
Market Implied Growth Rate 3.61%
Net Current Asset Value (NCAV) -$15.77
PEmg 15.72
Current Ratio 1.90
PB Ratio 4.04

Key Data:

Balance Sheet – 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $23,543,000,000
Current Liabilities $12,396,000,000
Total Debt $10,755,000,000
Total Assets $51,990,000,000
Intangible Assets $9,853,000,000
Total Liabilities $38,149,000,000
Outstanding Shares 926,070,000

Earnings Per Share – Diluted

2013 (estimate) $5.47
2012 $2.61
2011 $3.73
2010 $3.31
2009 $1.95
2008 $2.21
2007 $3.23
2006 $3.38
2005 $2.07
2004 $1.76
2003 $0.99
2002 $1.83

Earnings Per Share – Modern Graham

2013 (estimate) $3.84
2012 $2.93
2011 $3.03
2010 $2.72
2009 $2.47
2008 $2.67

Conclusion:

Du Pont is a strong company that may be suitable for an enterprising investor but not a defensive investor.  The company’s current ratio is too low and the price to book ratio is too high for comfort for the defensive investor.  However, the ModernGraham valuation model does view the company favorably, and it appears to be undervalued.  This is a company that is absolutely worth further research by an enterprising investor.

What do you think?  Is Du Pont undervalued or does Mr. Market have it right?

Disclaimer:  The author did not hold a position in Du Pont at the time of publication, and had no intention of purchasing a stake in the next 72 hours.

Photo Credit:  Andrew Magill

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