E I Du Pont De Nemours And Co (DD) — better known as DuPont — finds itself in a proxy battle with activist investor Nelson Peltz, whose Trian Fund Management is seeking four board seats after months of bickering with the chemicals giant. Hey, if nothing else, the attack should boost DuPont stock in the shorter term.
Nelson Peltz has been increasingly critical of DuPont’s earnings and margin performance — and the performance of DuPont stock — over the last 18 months and has been calling for a breakup of the company.
Peltz contends that DD’s conglomerate structure weighs on DuPont stock and destroys shareholder value. Furthermore, there’s no single compelling reason to own DuPont stock, as Trian says DD stock is “neither a pure-play growth company, nor a cyclical recovery play nor a capital return story.”
Trian Fund Management built a 2.7% stake in DuPont to 2.7%, worth about $1.8 billion. Upping the ante, Nelson Peltz and Trian Fund Management have now nominated four directors for election to the board at DuPont’s annual meeting.
DuPont is already spinning off its division that makes paint pigments and Teflon, but that falls far short of what Nelson Peltz wants to get DD moving. Indeed, Trian says a real breakup of DuPont would double the value of the business in three years.
Nelson Peltz has outlined five reasons for DuPont’s and DD stock’s consistent underperformance:
- excessive holding company costs
- overwhelming complexity
- bureaucracy and a lack of management accountability
- inefficient capital structure
- a persistent conglomerate discount to its share price
DuPont Stock Is a Bull-Market Winner
Interestingly, Nelson Peltz and Trian Fund Management said they don’t want the board election to be a referendum on separating the businesses, “but rather a referendum on DuPont’s performance.”
That might be a tough sell given that DuPont stock has fared well throughout the bull market. Sure, DD might lag competitors by earnings growth and operating margins, as Trian contends, but the share performance has been tougher to criticize.
True, DuPont stock beat the broader market in 2014 only because Trian Fund Management very publicly put the company in its sights. But if you extend that chart somewhat father back in time, DD has easily outpaced the S&P 500. Since the bear-market bottom of March 2009, DuPont stock is up more than 360% on a price basis compared to a gain of about 200% for the broader market.
By Nelson Peltz’s reckoning, that outperformance should have been ever greater, and maybe he’s right, but it’s also very tough to win a proxy fight cleanly. Although Trian has a chance to seat all four nominees to the board, a more likely outcome is that it wins one or two and comes to some sort of compromise with management over the rest of its demands.
Whatever the outcome, campaigning ahead of the annual meeting — most likely in April — should only serve to give DuPont stock even more short-term upside.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
