Should I Do It? DuPont Gets a Look

Editor's note: Beginning today, we will run a "Should I Do It?" column every Wednesday by David Peltier, our value stocks expert. In the column, David will take a look at a value stock and explain if you should snap up shares or pass it over. Peltier has been a regular on RealMoney for a while and also writes TheStreet.com Value Investor.

This morning, DuPont (DD - Cramer's Take - Stockpickr) warned that fourth-quarter earnings will come in at 10 cents a share, falling short of the consensus analyst earnings estimate of 24 cents. Management said the $200 million discrepancy was divided between hurricane-related disruptions, unplanned outages at two foreign plants, and weaker sales in two divisions. As a result, the stock fell almost 3% Wednesday afternoon, to $41.28 a share.

With a 3.6% dividend yield, DuPont is one of the dogs of the Dow Jones Industrial Average. At current levels, the stock is up 13% from its October lows yet down 23% from where the company was trading last March. At 15 times the 2006 consensus analyst earnings estimate of $2.89 a share, DuPont trades below its average historical valuation, even though the third-largest U.S. chemicals maker is on track to post its third straight annual earnings increase in 2006.

That said, does DuPont hold value for investors?

The chemicals sector took off about a year ago, after leaders like DuPont and Dow Chemical(DOW - Cramer's Take - Stockpickr) put together a few strong quarters. Even so, the enthusiasm left this sector by the spring of 2005, as natural gas prices -- which are large component costs for chemicals producers -- began soaring. Around $9.30 per million BTU, natural gas futures contracts are trading well above their historical average of $2 to $4. Even so, the commodity is a far cry from the $15 level at which it was trading less than a month ago.

The good news is that DuPont has been able to pass along much of the higher costs to its customers. Most recently, the company boosted prices for white pigment titanium dioxide on Jan. 1. DuPont sees about $2 billion of annual revenue from this compound. This increase is possible, because production capacity is very tight relative to the strong demand out of China -- where DuPont logged $1.4 billion of annual revenue last year -- and other emerging economies. The company is looking to take advantage of this boom by investing $1 billion in a new pigment plant in Dongying, China. Expected to open by 2010, the site represents DuPont's largest current single investment project.

To view David Peltier's video take on DuPont, click here.