Du Pont is one of the world’s largest companies, which makes it easy to look at it and simply say that due to its incredible size it should be suitable for defensive investors. However, Intelligent Investors must do more analysis than that, and will have specific requirements of companies in which they choose to invest. Only through comparing the company’s intrinsic value to the market place can an investor truly get a sense of whether the company is a good investment. In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Du Pont fares in the ModernGraham valuation model.
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 Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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 – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$43.68|
|Value Based on 0% Growth||$25.61|
|Market Implied Growth Rate||6.02%|
|Net Current Asset Value (NCAV)||-$11.74|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Du Pont is a solid company for Enterprising Investors to have on their watch list, but not Defensive Investors. For Defensive Investors, the company’s current ratio is just a little too low, the company has not sufficiently grown its earnings over the ten year period, and the company is trading at high PEmg and PB ratios. Enterprising Investors, on the other hand, could not be happier as the company has passed all of the requirements of this investor type. As a result, value investors seeking to follow the Enterprising Investor portion of the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research, including a review of ModernGraham’s analysis of Dow Chemical (DOW). From a valuation side of things, Du Pont has grown its EPSmg (normalized earnings) from $2.46 in 2009 to $3.01 for 2013. This level of growth does not quite support the market’s current implied growth estimate of 6.02%, and accordingly the ModernGraham valuation model returns an intrinsic value that is less than the market’s current price. Therefore, the company appears to be overvalued at the present time.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Du Pont (DD)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author did not hold a position in Du Pont (DD) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.