To the bottom right of every Graph in a Value Line stock research report is a little table showing the total return of a company’s stock over the trailing one-, three-, and five-year periods. While this information alone shouldn’t be enough for an investor to make a final investment decision, it can provide an informative look at what has happened in the recent past.
In the case of DuPont (DD – Free Value Line Research Report for DuPont), this table shows a company that advanced over 60% between June of 2010 and June of 2011. That’s a decent advance, especially when compared to the broader market, which was up just over 35% in that span. The quick rise in this conglomerate’s shares should lead to the question, “Can it keep going?”
Taking a look at the price chart in the Graph shows that the shares have taken a breather of late. This could be good or bad news, however, so more information is needed to answer the question. There are two arguments that can be made using the Value Line research report that suggest the answer is, “Yes, the shares continue to have substantial upside potential.” One is based on the Value Line analyst Michael Napoli’s expectations over the next three to five years and the other is based on the stock’s current valuation.
To the far right of the Graph is a set of dotted lines that visually represent Napoli’s target price range for DuPont stock of the next three to five years. These lines sit at 90 on the low end and 110 on the high end. The actual numbers are shown to the left of the graph in the Projections box. From the recent price of $54.45 (found in the Top Label section that runs across the top of the report), an advance to $90 would result in a 65% increase, while a move to $110 would lead to a 100% gain. Taking into account the company’s generous dividend, it currently yields 3%, the annualized returns over that three-to five-year period at the high and low ends of the range would be 21% and 16%, respectively.
Supporting these figures are an analyst’s three-to-five year earnings projection, the projected Average Annual P/E Ratio, and the stock’s Safety Rank. The first two measures can be found in the estimates portion of the Statistical Array (note that estimates are denoted by bold type font). Value Line’s proprietary Safety Rank, which is, itself, a combination of other measures, can be found in the Ranks box at the top right of the report. Multiplying the earnings projection by the projected P/E provides a specific price point. Value Line believes strongly that such long-term projects are inherently difficult to make, so that a single price point would be misleading. As such, we use a company’s Safety Rank to create a high and low range around that point. The better the Safety Rank the tighter the price range and vise versa. Since DuPont receives Value Line’s best possible Safety Rank, the price range is rather small.
An investor should be pleased with returns in that range, even if performance only approximates the low end of the projected range, particularly for a company as financially strong as DuPont. Note that Napoli’s projections are backed up by the Analyst Commentary section of the report, in which the analyst notes, “Long-term prospects also appear favorable.”
What about the current valuation? Although not as “cheap” as they were last year, DuPont shares still remain at compelling price levels. The Relative P/E Ratio, found in the Top Label section, is currently 0.86, suggesting that the shares are inexpensive relative to the market. From a historical perspective, 0.86 is near the low end of the historical range, which can be found in the historical portion of the Statistical Array. Moreover, the current P/E of 14.1 is also toward the low end for the shares’ recent history.
This is noteworthy for a company that traces it roots back to 1802, when it manufactured gunpowder. During the 20th century, the company developed many highly successful materials, such as Vespel, Teflon, Kevlar, and Tyvek, some of which are household names. Indeed, the company has proven quite successful at popularizing the brands of its material products. Today the company is best described as a leading science and technology enterprise engaged in a wide range of disciplines, including high-performance materials, electronics, safety and security, and biotechnology.
In combination, the projected price performance, current valuation, and size and scope of the company’s business, suggest that DuPont shares would be a worthwhile consideration for just about any investor.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.