Should You Buy the Dow — DuPont

Today, were looking at Dow Jones component E.I. du Pont de Nemours & Company
or, if youre looking for something a little more familiar, DuPont (NYSE: DD ) .
Readers should know that I hold a chemistry degree from Cornell University and I
know a lot about chemicals. That doesnt mean I know a whole lot about chemical
companies , though, so Im learning along with you. We all know DuPont means
chemicals, but youll be amazed to learn exactly how this translates into
products. DuPont has six segments. Heres a brief overview of what they all do
(prepare to be surprised): The Agriculture & Nutrition segment makes seeds,
grains, proteins and pesticides. The Electronics & Communications segment
supplies materials and systems for printing and electronics. The Performance
Chemicals segment offers specialty and industrial chemicals for many industries.
The Performance Coatings & Materials segment supplies coatings and materials for
automakers and parts, as well as for electrical, electronics, packaging,
construction, oil, photovoltaics, aerospace, chemical processing and consumer
durable goods. The Safety & Protection segment offers solid materials for all
major industries. The Pharmaceuticals segment collaborates on antihypertensive
drugs. Who knew? The key driving factor for DuPont is the economy. The advantage
DuPont has in this regard is it provides its products to numerous industries
that might not be as economically sensitive. So some areas might get hit hard
while others do fine. DuPont also has the boring stock element at work: Its not
a sexy company, so it sometimes seems like the market is overlooking all the
great things DuPont does. Which means the stock might find itself at
inexplicable discounts at times. Right now, stock analysts looking out five
years on DuPont see annualized earnings growth at 10.3%. At a stock price of
$42, on FY 2011 earnings of $3.99, the stock presently trades at a P/E of 10.5
exactly the same as its long-term growth rate. Dow Chemical (NYSE: DOW ) is the
closest competitor, and it trades a similar P/E of 11.7. DuPonts financials are
exactly what youd expect from a company that has a very long operating history
and is classified as a stalwart. The company carries $2.5 billion in cash and
$12.5 billion in debt, with interest running about 6% annually. Trailing
12-month cash flow was $5.5 billion. The company also had 3.5 times the amount
of free cash flow necessary to pay its 4.1% dividend. It is comforting to see
all that free cash flow, and investors should note that the company even was
generating $3.5 billion in free cash flow during the height of the financial
crisis. Conclusion DuPonts history and solid free cash flow convince me to put a
slight premium on its P/E valuation. If we put an 12 P/E on DuPont, then on
projected 2015 earnings of $6.09 per share and factoring in 4.1% compounded
dividend yield reinvested we get a price target of $87. Thats a solid double
from these levels. I believe DuPont is a buy for regular accounts. I believe
DuPont is a buy for retirement accounts. Lawrence Meyers does not own shares of
any company mentioned.