Do DuPont As Agriculture Soars

I was fortunate enough to hear John Mellencamp perform at a very small venue a number of years ago. Tonight Billy Joel will present John Mellencamp for induction into the Rock and Roll Hall of Fame at the Waldorf Astoria. Rain On The Scarecrow was released in 1985, and things weren’t great for the small farmer at the time.

Oh my, how things have changed. Without question one of the great secular growth stories over the last 18 months has been agriculture. For illustration, we need only look at the explosive stock moves in companies like Deere & Co. (DE), up about 155%, Monsanto (MON), up about 145% since August of 2006, and Potash (POT), up about 400% over the same period of time.

Although on a valuation basis I can still make a compelling argument for each of these stocks, the parabolic moves higher may be enough to scare off grizzled veterans. But if we accept the fact that the agriculture story is still very much alive, what’s the trade?

E.I. du Pont de Nemours & Company (DD), from here on referred to simply as DuPont, is worth a look. According to the company’s website, "In 1802, DuPont was primarily an explosives company. One hundred years ago their focus turned to chemicals, materials and energy." These days, when many people think of DuPont, they think of Corian and Kevlar. But there’s been something of a seismic shift at the company.

On February 20th, DuPont reaffirmed its outlook for first quarter and fiscal 2008. The company went on to say its "agriculture and nutrition segment is on track to deliver double-digit earnings growth in 2008 by increasing North American corn trait penetration to 90% from 75% in 2007." But it’s not just about corn. DuPont enjoys strong positions in animal health solutions, crop protection, seeds and inoculants and vegetation management. To that end, more than 20% of their revenues are now derived either directly or indirectly from agriculture.

At 14.00 times trailing and 12.50 times forward earnings, DuPont is much cheaper than the pure agriculture plays of Potash, which currently trades around 46 times trailing and 19 times forward earnings, and Monsanto, which trades at 51 times trailing and 30.50 times forward earnings.

I bring the distinction to light because I still believe we’re early in the cycle of DuPont's growth in the agriculture space. Although it will never enjoy the hefty multiple awarded to leaders like Potash and Monsanto, there’s still tremendous room for multiple expansion.

Obviously, entry points are everything, and more so in the current environment. Since trading as low as $42.50 in mid- to late January, DuPont has seen a nice bounce of close to 10%. The $47.50 level on the upside has proved to be resistance as recently as February 27th and December 10th before that. I think we could potentially see DuPont trade back down to $44.50 or so, and I think that would provide a fantastic entry point. For those who are a bit more aggressive, starting to build a position at current levels may be a reasonable idea.

On March 4th, DuPont was initiated at outperform (along with Monsanto, interestingly enough) at Credit Suisse with a price target of $57. I don’t think we go straight up from here, but a close above $48 may signal a breakout. It’s also important to mention that DuPont pays a tidy dividend of 3.5%.

I love the way their product mix has changed with the times over the years. It’s my contention that DuPont provides us with a great -- and relatively cheap -- way to play the still-robust agriculture industry.