E I Du Pont De Nemours And Co (DD), The Dow Chemical Company (DOW): Should We Follow Nelson Peltz Into This Stock

Since the beginning of the year, E I Du Pont De Nemours And Co (NYSE:DD) has experienced a nice gain of as much as 33%, beating the S&P 500’s gain of nearly 20%. Recently, famous activist investor Nelson Peltz revealed at the Delivering Alpha conference that he has purchased a lot of the company’s shares. Let’s take a closer look to determine whether or not we should follow Nelson Peltz into DuPont now.

A cash cow and a strong balance sheet with decent dividend yield

E I Du Pont De Nemours And Co (NYSE:DD) has a long operating history dated back to 1802, operating in eight reportable business segments, including Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, Safety & Protection, and Pharmaceuticals. It employs around 70,000 people with operations in more than 90 countries globally. Agriculture and Performance Chemicals are the two biggest profit contributors, with around $1.59 billion in operating income in 2012. The third place belongs to the Performance Materials business, with more than $1 billion in operating income.

What I like about E I Du Pont De Nemours And Co (NYSE:DD) is its cash generation capability. In the past ten years, DuPont has managed to generate consistent positive cash flow. The operating cash flow increased from $2.59 billion in 2003 to nearly $4.85 billion in 2012 while free cash flow grew from $876 million to more than $3 billion during the same period. Moreover, DuPont employs some leverage in its operations. As of June 2013, it had nearly $13.3 billion in equity, nearly $6.9 billion in cash, and around $7.2 billion in net debt.

E I Du Pont De Nemours And Co (NYSE:DD) has generated higher shareholder returns via business restructuring. First, it redesigned its cost structure to deliver around $2 billion in total savings over the past four years. Second was portfolio enhancement, including a $7 billion acquisition of Danisco and the $5 billion sale of performance coatings to The Carlyle Group. In terms of long-term performance, DuPont expects to grow its sales by around 7% and operating EPS by around 12%.

Higher valuation than Dow Chemical and BASF

The market values E I Du Pont De Nemours And Co (NYSE:DD) at around 10.6 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization). The dividend yield is decent at 3.10%. Compared to its peers The Dow Chemical Company (NYSE:DOW) and BASF SE (ADR) (OTCMKTS:BASFY), DuPont is the most expensive among the three.

The market values The Dow Chemical Company (NYSE:DOW) at 7.86 times its trailing EBITDA. Recently, Dow Chemical witnessed earnings growth and margin expansion. In the second quarter of 2013, Dow Chemical experienced better operating performance. Its adjusted EPS came in at $0.64, nearly 16.4% higher than the EPS of $0.55 in the second quarter last year. Adjusted EBITDA grew 8.7% year-over-year to $2.13 billion.

The higher earnings and improvement in margins in the second quarter was due to the company’s restructuring program, the growing Performance Plastics business, especially in North America on strong shale fundamentals, and higher equity earnings. Looking forward, The Dow Chemical Company (NYSE:DOW) expects to benefit from improvement in the U.S. market, driven by residential construction.

The company stays bullish about fundamentals in key end markets, including high farm incomes, transportation market growth, and improvement in the electronics industry. Thus, The Dow Chemical Company (NYSE:DOW), with its global leading position, could be a good stock in the long run. Income investors might also like Dow Chemical due to its juicy dividend yield of 3.70%.