Why DuPont's Restructuring Will Likely Pay Off

Why DuPont's Restructuring Will Likely Pay Off

Chemicals giant E.I. du Pont de Nemours & Company is embarking on a new age for itself, one that has involved an aggressive restructuring of its business over the past few years. First, DuPont acquired global enzyme and specialty food ingredient company Danisco for nearly $6 billion in 2011. The following year, DuPont sold off its Performance Coatings unit to The Carlyle Group for $5 billion.

Unfortunately, these initiatives haven't provided the results management wanted so far. And yet, management is entirely confident in the company's future. DuPont's revenue growth is slowing, which has called its strategic shift into question. It seems as though the key consideration for investors going forward is whether you believe management's vision will ultimately pay off.

Do you buy DuPont's value proposition?
DuPont labels itself as a company optimally positioned for high growth and value, due to its new business structure which management believes is focused on the best opportunities. Unfortunately, progress has been slow to materialize. Consider that DuPont generated just 3% sales growth in 2013. Sluggish sales growth last year was due to poor performance in its Performance Chemicals and Electronics segments, which posted sales declines of 7% and 6%, respectively.

Going forward, DuPont is focusing on three key segments: Agriculture & Nutrition, Advancement Materials, and Industrial Biosciences. Collectively, DuPont management feels its business is best positioned to serve these markets. That's because these are where rising demand for better food and advanced fuels and materials create highly promising growth opportunities.

While results haven't shown up yet, there's reason to believe DuPont's strategy is the right one. The underlying economics of the agriculture industry are extremely favorable. That's because global populations continue to expand, and rapidly emerging economies have placed an enormous strain on food production. In addition, DuPont's existing Agriculture division was is best-performing business segment last year, since it produced 13% sales growth and is the company's largest operating unit.

Divestments across the industry
DuPont's strategy of aggressively selling off business divisions not deemed critical to future operations is emblematic of the entire chemicals industry. Chemicals companies across the board are tightening their belts and slimming down, preparing to do more with less. For example, Dow Chemical announced plans last year to sell off its chlorine segment, which was its oldest business. This move was part of a plan to divest various businesses that amounted to $5 billion in annual revenue. The goal here is to shore up its balance sheet and raise cash in a broader initiative called the "Efficiency for Growth" plan.

It's worth noting that shareholders are seeing immediate benefits from this strategy in the form of greater cash returns. Dow recently increased its dividend by 15% as well as expanded its share repurchase authorization to $4.5 billion, to be completed this year.

At the same time, caution is warranted because Dow's core underlying business is struggling. Its net sales grew by just a fraction of a percent last year. Profitability expanded significantly—adjusted earnings jumped 30% in 2013—but bottom-line growth was due largely to share buybacks and aggressive cost cuts. Long-term earnings growth is limited without sales growth cooperating.

Management ability is the true test
Chemicals companies are embarking on an 'out with the old, in with the new' mentality. They're disposing of older business segments that have suffered slowing growth in recent years. Going forward, the strategic shifts will pave the way for more profitable long-term futures from the higher-value opportunities DuPont and Dow are turning their efforts toward.

DuPont's focus on agriculture seems like a wise move. The favorable economics of the agriculture industry represent a strong tailwind. Plus, DuPont's agriculture business was its best-performing segment last year in terms of sales growth. As a result, the path for success is already there.

Still, shedding profitable, time-tested business segments is a risky move. In the end, whether these decisions prove to be profitable ones depends largely on management's ability to execute their plans.

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The article Why DuPont's Restructuring Will Likely Pay Off originally appeared on Fool.com.

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