On Tuesday, it looked like corporate-raider-turned-activist hedge fund manager Nelson Peltz scored a victory in his battle with DuPont.
The chemical giant announced that it had earned $4.01 a share in 2014. That was up from a year ago, but it was lower than analysts’ expectations, which were as high as $4.10 and had already been falling over the past six months. Worse, the company lowered expectations for this year as well, saying it could earn as much as $4.20 a share. Analysts had been predicting $4.45 for 2015.
The earnings miss added credence to one of Peltz’s main complaints about DuPont (DD) and its management team, led by CEO Ellen Kullman. Peltz says the company has not lived up to expectations. Earlier this month, Peltz launched a proxy fight to name four new directors, including himself, to DuPont’s board.
DuPont’s revenue fell in the fourth quarter of 2014 in nearly every one of its business segments. But that wasn’t because DuPont sold less. In fact, its sales volume rose by 3% in the last three months of 2014. What dropped was prices, by 1% on average during the quarter. DuPont also took a 3% hit on account of the dollar’s appreciation, which made the company’s overseas sales worth less.
Sales fluctuations and earnings misses might win rhetorical points for Peltz’s argument that the company needs different management, but for DuPont, these events were probably going to happen no matter who was running the company. It’s a large multi-national company in a somewhat cyclical business at a time when the global economy looks to be flagging. A weaker economy in Brazil, for instance, led to lower corn seed sales for DuPont. Not a lot you can do about that.
And DuPont wasn’t the only one dealing with the fallout of a weaker global economy. On Tuesday, Caterpillar (CAT) missed earnings expectations, in part because of the drop in oil prices and slower growth overseas.
So, given the gloomy global outlook, would Peltz, or anyone else, be able to do better with DuPont? Peltz’s main argument is that DuPont’s conglomerate structure makes it hard for the company to cut costs and that, in turn, hurts profits. Peltz would like DuPont to split into three parts. But Peltz’s break-up plan is not about driving up sales. Even by his own numbers, the investor’s plan will likely cause DuPont’s sales to be $1 billion lower than if it were to stay together.
Peltz argues that the payoff for those lower sales will be higher profits, which will come from splitting the company into leaner parts. But DuPont’s profitability is already growing. Despite the drop in sales, DuPont’s profit rose in nearly every one of its business segments in the fourth quarter. Profit margins in DuPont’s performance materials segment, one of the company’s largest, rose by 3.4 percentage points during that period.
On top of the profit increase, DuPont said it would cut an additional $300 million in costs for a total of $1.3 billion in reductions by the end of 2017. Overall, the company’s EBITDA profit margins rose to nearly 20% in 2014, up from 18% a year ago. Factor in the projected cost cuts, and DuPont’s margin rises to 24%, or about one percentage point higher than what is projected under Peltz’s breakup plan.
Shareholders seem to get this. Despite the profit disappointment, DuPont shares, which have been up nearly 25% over the past year, fell less than 1% on Tuesday, on a day when the rest of the market was getting walloped. Peltz has suggested that shareholders would do better without Kullman and her team. At least for now, DuPont’s shareholders disagree.