DuPont – An Unusual Stake In the Ground

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Yesterday DuPont’s Chair and CEO Ellen Kuhlman wrote a letter to shareholders.  In that letter she discussed the transformation of DuPont over the last decade and put the recent Performance Chemicals spin news into context as part of that transformation.

The subject was previously covered in calls and in the press following the announcement of the spin out in late October, and the concept of exiting the business has been in the market since the company discussed separating the business several months ago.

So why the letter and why now?   Normally a company would make any major announcement through either a press release or a conference call.

Our best guess is that not all shareholders are in favor of the Performance Chemicals spin, and that DuPont wants to make its case to shareholders before anyone else makes a counter-case, or perhaps to discourage such a move.

In our view, and we have written about this extensively, the DuPont story is all about technology and the crossover of science and technologies going forward between agriculture, nutrition and materials using bio based pathways.  If this technology and research portfolio is as powerful as DuPont suggests, then the company is right to keep the structure and the businesses it currently plans to keep and divest the current targets.  Does everything they plan to keep today make sense longer term, probably not, but these would be smaller and much more straightforward divestments than exiting a business segment in its entirety, like Performance Chemicals.

If the thesis on the science is wrong, then the strategy is probably flawed and the more value creative move would be to divide the company more aggressively, separating Ag and Nutrition from the rest.

As an outsider, it is almost impossible to take a view one way or the other, because the company does not provide enough data around the efficacy of its R&D pipeline to give us confidence that not only is this a going to be a profitable and high growth venture, but that it is also going to apply effectively across all 3 platforms.   We hope that the company will be forthcoming with such metrics and hope that this happens before the company is backed into a corner, which is probably a risk today.

DuPont is relatively unloved by the market today, as shown in Capital IQs ranking of recommendations – below.  The stock is also very “under-owned” by the larger institutions. This suggests that the average investor/analyst either does not understand the science story or does not believe it.

We are believers, as we have indicated in our research all year, and we are also believers that the spin is the right move.

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