In the current slow-growth economic environment, I’m looking for shares of companies that can turn modest top-line growth in unit volume into better-than-expected bottom-line earnings growth.
And that’s exactly what DuPont (DD) reported on July 28 for its second quarter of 2011. Earnings of $1.37 a share were two cents a share above consensus, and revenue climbed 19% from the second quarter of 2010 to $10.26 billion, above the Wall Street estimate of $9.9 billion.
But to see what I mean, look at how DuPont got that 19% increase in revenue. Just two percentage points came from higher volumes while a whopping 11 percentage points came from higher local prices. (Exchange rates and a shift in the company’s sales mix toward higher-margin products account for the rest of the revenue gain.)
This was true in business segment after business segment, and most importantly, for investors looking beyond the current quarter in DuPont’s performance coatings unit—known to you and me as auto paints. Sales in that segment rose 15% from the second quarter of 2010. Of that, one percentage point came from higher volumes and 14% from higher prices.
Why is that important? A company that can maintain pricing pressure in a slow-growth economy is positioned to crack on the earnings growth when volumes pick up. (It’s also likely to be able to stay ahead of rising raw materials costs.)
DuPont raised its projections for growth in industry-wide auto production to 5% for 2011 from an earlier projection of 4%. That’s not much of an increase, but with DuPont able to leverage every bit of volume growth into extra profits using its pricing power, it’s one reason that the company was able to raise its earnings guidance for 2011 to $3.85-$4.00 a share from the earlier $3.65-$3.85. (The new and old projections don’t include the recently concluded acquisition of enzyme-maker Danisco.) Don’t forget, these shares also pay a dividend yield of 3.1%.
DuPont shares were up 6.8% as of the July 28 close from when I added them to my long-term Jubak Picks 50 portfolio back in January. I think a 12-month target price on these shares is $64 if the US economy can keep growth above a 2% annual rate. I’d put the target at $60 if growth is between 1.5% and 2%. The stock closed at $52.30 on July 28.
Full disclosure: I don’t own shares of DuPont in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of DuPont at the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
