‘Old-Economy’ DuPont Eludes Sell-Off
As “new-economy” technology stocks were mauled last week, the shares of E.I. du Pont de Nemours & Co., an “old-economy” company renowned in chemistry, physics and biology, rose sharply and held on for a small gain. DuPont, which closed Friday at $56.55, has risen almost 25% in the last month.
DuPont’s rebound reflects new respect for the strengths and adaptability of traditional companies. In DuPont, investors perceive a deep base of technological abilities, innovative moves in the new industrial environment and, most of all, a sense of mission that this venerable firm will move forward with growing sales and earnings worldwide.
DuPont’s earnings per share have been “essentially flat” for the last four years, Chairman Charles “Chad” Holliday concedes in the company’s annual report. No surprise that DuPont stock was in the doldrums; even after last month’s rise, the share price is still below what it was in 1997.
“I do not consider this lack of growth acceptable,” Holliday said in an interview.
So he and DuPont are doing something about the company’s stalled fortunes in ways that show the folly of labeling companies “new” or “old” economy.
Successful companies clearly are going to have both the strengths of traditional industry and the quick savvy of the new.
DuPont illustrates the difficulties of dealing with the rigors of a speeded-up world economy and the pressures of an impatient stock market.
The company’s advances in science are as exciting as ever. DuPont today is working in “microbial systems” to make biological molecular structures part of the manufacturing process, in Holliday’s words. For a new type of polyester that will stretch and recover the garment’s original shape, DuPont is using polymers of corn instead of traditional petrochemicals. It is also using tobacco plants to make plastics.
Such advances will provide new products for the company during the coming decade.
But meanwhile DuPont is depending on its traditional strengths in chemical products, specialty fibers such as the stretch fabric Lycra, home construction innovations such as Tyvek material and the venerable fiber nylon, which is finding new uses in automotive air bags.
Indeed, traditional chemicals, fibers, pigments and coatings provide roughly 75% of DuPont’s income, which came to $2.8 billion last year before special accounting related to the company’s sale of Conoco oil company.
At DuPont, such chemicals are specialty items with brand names known to industrial users and often to consumers, in names such as Stainmaster carpets. That means the products provide operating profit margins of 30% to 50%, far more than commodity chemicals earn.
Yet even brand names haven’t been enough to offset the intense downward pressure on prices in recent years, as markets for all manufactured goods became global auctions.
The extent of such pressure can be gauged from the fact that price declines wiped out what would have been a $780-million gain in DuPont’s sales last year.
What is DuPont doing to cope in such an environment, and why do stock market investors believe it will succeed?
It is using the Internet to get ahead of the game on cost reductions. DuPont and Dow Chemical Co., Celanese, Germany’s BASF and other chemical firms are forming an Internet site to purchase chemical ingredients at the lowest prices.
More significantly, DuPont is investing $100 million in a joint venture with Internet Capital Group Inc. to set up Web sites in apparel and construction materials, so that customers in those industries worldwide can purchase DuPont’s products more efficiently.
Investors are enthusiastic because the time is ripe for chemical prices to strengthen, with economies in Asia, Europe and Latin America enjoying the fastest growth in years. Thus Dow, Union Carbide Corp., BASF, Bayer and other global chemical companies are enjoying favor in the stock market.
“But beyond the world economy’s cyclical upturn, DuPont qualifies as a long-term buy because of its strength in science and brand names,” says analyst Graham Copley of Sanford C. Bernstein & Co., a New York research firm.
DuPont innovates. It is applying techniques learned from working with Hewlett-Packard Co. on inkjet printers to spray paint for cars, a major DuPont business. It is working to adapt the techniques to printing textiles.
The company is selling its knowledge in the form of services. From a history that began with making gunpowder for the American Revolution, DuPont has developed great knowledge in plant safety. “Now we’re supplying safety services to our customers’ facilities,” says Holliday, 52, an industrial engineer and 30-year DuPont veteran who became chairman in 1997.
Such services brought DuPont $40 million in consulting fees last year and will bring $80 million this year.
DuPont is reforming from within. “They’re getting impressive cost savings inside the company,” notes analyst James Wilbur of Salomon Smith Barney. The company is adopting the “six sigma” techniques made famous at General Electric Co., in which teams of employees earn incentive pay for devising ways of doing things more efficiently.
“We have 2,000 six-sigma teams working now [in a company of 94,000 employees],” Holliday says. “Last year we gained $300 million in cost savings and this year we’ll do better.”
Holliday has pledged to investors that DuPont will grow 6% a year in sales and 10% a year in earnings per share. That investors believe him was evident last week as DuPont rose above the carnage in the stock market.
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James Flanigan can be reached at jim.flanigan@latimes.com.
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DuPont at a Glance
DuPont’s share price has risen almost 25% in the last month--closing Friday at $56.55--but is still below recent highs. The company’s rebound illustrates the hazards of labeling companies “new” or “old” economy. It also shows how today’s successful companies must have the strengths of “old-economy” companies as well as the quick savvy of the “new.” * Name: DuPont Co.
* Employees: 94,000
* Headquarters: Wilmington, Del.
* 1999 sales: $26.9 billion
* 1999 income*: $ 2.8 billion
* 1999 earnings per share: $2.58
* Before special accounting items
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Friday: $56.55
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Sources: Bloomberg News, Times research
