These are interesting times for DuPont (DD) - Get Report , with Chairman and CEO Ellen Kullman's retirement. The chemical giant is expected to see activist investor Nelson Peltz and his Trian Fund Management play a more important role in strategic decisions. DuPont's stock is down about 12% year to date, but let's look beyond this temporary slump to see why it's a wise addition to your portfolio (and currently undervalued, one of many).
DuPont's strongest competitor Dow Chemical (DOW) - Get Report (shares up 10% year-to-date), and pint-sized rival Ashland (ASH) - Get Report (shares down 11%), wowed investors with their recent operating results. Kullman, on the other hand, failed to impress shareholders as earnings continued to slide through the year.
DuPont announced that its full-year operating earnings a share are set to be around $2.75 instead of the prior forecast of $3.10. A strong dollar, the performance of its chemicals unit Chemours, and the lukewarm demand for its crop-related products haven't helped its case either.
But there is more to the picture than at first appears.
After the sudden retirement of Kullman, Edward Breen, a member of the DuPont board of directors, assumed the role of interim chair and CEO of DuPont. The Board engaged an executive recruitment firm to find DuPont a permanent replacement for Kullman. However, it's Breen whom investors are interested in. The man engineered two breakups at Tyco (TYC) and the buzz is, he is likely to consider the same for DuPont.
Separating out the viable businesses of this $55 billion enterprise and nurturing them may not be a bad idea, after all. It would unlock value for shareholders if, say, the DuPont AG unit is sold to either Bayer (BAYN) , BASF or Syngenta (SYT) .
If you split DuPont into 1) an agriculture, nutrition, and biosciences firm, and 2) a chemical and materials company, instead of running these businesses in a single mold, you are likely to make better use of resources and streamline the management. It would be interesting to see who else might like the break-up idea.
With Peltz in the picture, there will always be vision and direction. Without his pressure tactics, DuPont might have floated a few more years before finding balance. He spoke about cost-cutting and the need for change long before people figured they were due. The maverick businessman kept his DuPont stake throughout the share price decline.
Peltz's faith in DuPont is definitely not emotional. If he manages to make an impact on the company's agriculture business which generates a major chunk of revenues, DuPont may well proper. Note that Peltz is no stranger to these games. He pressured PepsiCo (PEP) - Get Reportto split the company and even got a representative on its board recently.
Add it all up and you see hope for DuPont, especially as a recovery play. And with a trailing 12-month price-to-earnings ratio of 18.4, the stock is cheap compared to the P/E of 20 for its peers.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.