Will DuPont Outgrow Monsanto and Syngenta in 2014?

DuPont has soared in 2013, with its gains of more than 35% year to date well outpacing the Dow Jones Industrials' 21% advance. As the company known historically for its chemical prowess evolves toward more of an agricultural focus, though, it will face the question of whether it can grow faster than Monsanto and Syngenta and establish itself as the premier developer of seeds, fertilizer, and other high-margin agricultural products in the industry.

The changing nature of the chemical industry has created a big rift among its various subsectors. On one hand, traditional businesses like titanium dioxide pigment production and other performance chemicals have become commodity-like in their returns, no longer offering the high profit margins that investors prefer. At the other end of the spectrum, the high demand for yield-enhancing crop products, including both seeds with desirable traits engineered into them and fertilizers and pesticides designed to keep crops healthy under challenging conditions, has pushed DuPont further in the direction of Monsanto and Syngenta. Let's take a closer look at DuPont's prospects for 2014.

Stats on DuPont

Source: Yahoo Finance.

How far can DuPont grow from here?
DuPont stock faces the same challenge as hundreds of other companies after the long bull-market rally, as even solid gains in its fundamentals appear to be almost fully priced into the share price. Based on analysts' current estimates, DuPont has only 5%-6% upside from current price levels, showing that Wall Street doesn't entirely trust the earnings and revenue growth projections that might otherwise justify a higher valuation.

The big question for 2014 is whether DuPont will manage to spin off its performance chemicals business during the year or whether it will take until 2015 to complete the deal. The move is so important because the unit's contributions to DuPont's overall earnings have been falling dramatically. In its most recent quarter, the unit saw revenue jump 12%, but operating earnings fell 38% as titanium dioxide prices dropped. In October, DuPont said that a spinoff could take up to 18 months, but pressure on the company to get a deal done sooner might provide enough inspiration to make it happen before 2014 ends.

DuPont hopes to use the same general strategy in 2014 that Monsanto did in the past to achieve its high-margin focus. Monsanto used to offer a broader array of chemicals, but nearly all of its revenue now comes from seeds, pesticides, herbicides, and other ag products. A deal between DuPont's Pioneer Seed and Deere to combine Deere's farm-equipment prowess with DuPont seeds will provide farm customers with one-stop assistance in making best use of both companies' products. That could give DuPont a key competitive advantage over Syngenta and Monsanto.

Of course, DuPont will face plenty of challenges. Monsanto recently bought The Climate Corporation, giving it a leadership position in helping farmers evaluate climate conditions to make better choices about which traits to target, as well as ongoing decisions like optimal planting times and crop choices in light of likely weather patterns. Meanwhile, the ongoing controversy over genetically modified organisms will inevitably continue, with Syngenta, Monsanto, and DuPont all likely joining forces to reassure consumers that GMOs aren't a cause for concern on food quality and health issues.

Investors should also remember that DuPont hasn't given up on other promising areas for potentially lucrative products. For instance, as the solar industry gets a new leg up from the popularity of residential installations, DuPont's expertise in developing solar-cell innovations could become more valuable. Bendable and stretchable products could also find use in other applications such as lighting, allowing DuPont to keep its reputation for innovation.

Despite still offering expertise in other areas, DuPont's performance in 2014 will likely depend on its continuing evolution toward becoming increasingly focused on the agricultural industry. As long as farm-commodity prices remain high enough to allow farmers to buy yield-enhancing products affordably, DuPont should keep cashing in on its transformation in 2014 and beyond.

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The article Will DuPont Outgrow Monsanto and Syngenta in 2014? originally appeared on Fool.com.

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