Why These Chemicals Giants Have Promising Futures
Oct 21st 2013 12:52PM
Updated Oct 21st 2013 12:54PM
Global populations continue to rise, which will result in greater demand for food in the years ahead. This is particularly true in the emerging markets, where outsized economic growth places even greater pressure on the search for sustainable sources of food. Thankfully, the world's major chemical and seed companies are investing heavily to meet the ever-changing global food landscape.
Rising demand for products and services offered by DuPont , Dow Chemical , and seed giant Monsanto means these companies should produce strong growth in the years ahead. As a result, investors should consider these industry leaders as viable candidates for investment.
Meeting global challenges
DuPont has taken huge strides in expanding and strengthening its business over the past few years. Chairman and CEO Ellen Kullman has laid out an aggressive growth plan for DuPont, with management calling for 12% compound annual earnings growth over the long term.In its last annual report, DuPont took great pride in the fact that 2012 was a record year for new product introductions. Furthermore, DuPont secured 935 U.S. patents last year, the most in the company's history, and the second year in a row in which DuPont set a new record for itself.
DuPont is also taking measurable steps to shore up its balance sheet by shedding assets the company believes to be non-critical. Last year, DuPont sold its Performance Coatings business for $4.9 billion, the proceeds of which will be used to strengthen its balance sheet and buy back its stock.
On the subject of strong balance sheets, Monsanto is definitely part of the conversation. The company boosted its cash position by $800 million last year. Moreover, Monsanto's total debt outstanding decreased by $147 million in 2012.
Smaller chemicals competitor Dow has reduced volatility of its underlying operations by divesting single-digit margin businesses. All told, the company shed $8 billion in underperforming businesses, while simultaneously acquiring specialty businesses such as Rohm and Haas that the company believes will offer higher returns and margins.
Collectively, Dow has organized its strategic priorities in an initiative termed the Efficiency For Growth plan. The goal of this is to strengthen the company's balance sheet as well as optimize its working capital. The company has improved its debt to total capital position over the past few years. In 2009, the company's net debt to total capital ratio was more than 4x. That same metric sits at roughly 2x today. Its EFG program, as well as significant cost reductions, led management to project $35 billion in cash from operations between 2009 and 2015, and the company is well underway in achieving this objective.
Emerging market growth a key driver of future profits
DuPont, Monsanto, and Dow each understand where the growth is geographically, and that's largely in the emerging markets. These companies have invested heavily into under-developed economies, where emerging middle classes and above-average economic growth will serve as key drivers of future demand for their products.
DuPont has invested heavily in new major research centers in developing nations such as China, India, and Brazil, and all told, generated 62% of revenue from outside the United States last year. In particular, DuPont is increasing its exposure to emerging markets. The company realized 34% of its total 2012 net sales from developing markets, up from 33% in 2011 and 31% in 2010.
Meanwhile, Monsanto generated 45% of its 2012 net sales from outside the United States. Above-average growth is being realized in several emerging economies, including Brazil and Asia-Pacific, where sales grew 25% last year and 21% since 2010, respectively.
For its part, Dow is deriving a larger percentage of its revenues from emerging markets than ever before. Over the past five years, Dow has increased the percentage of revenue from emerging markets by seven percentage points, from 28% in 2008 to 35% today. As the company notes, achieving close proximity to its customers will help lower costs and improve profitability going forward.
Stronger balance sheets and emerging markets are twin catalysts
DuPont, Monsanto, and Dow have proven themselves to be the leaders in solving the world's constantly changing food needs. They have each undertaken plans to streamline their businesses, focusing on the best opportunities going forward. Furthermore, all three have shed non-performing segments and used the proceeds to bolster their balance sheets and provide compelling cash returns to shareholders through dividends and buybacks.
As a result, DuPont, Monsanto, and Dow have bright futures ahead of them and should be considered for investment by both growth and income investors alike.
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The article Why These Chemicals Giants Have Promising Futures originally appeared on Fool.com.Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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