Mean, Tough S.O.B.s

Like apprehensive stragglers from the Japanese army who thought World War II was still going on long after it was over, Wall Street traders are super-sensitive these days about anything resembling the click of a rifle bolt. Take the case of E.I. du Pont de Nemours & Co., the nation's largest chemical producer. Four weeks ago, Du Pont announced that it would report profits for the second quarter slightly lower than those earned in the first three months of the year. Nervous investors took that as an indication that the recovery of the chemical industry had hit a snag, and sold not only Du Pont but the stocks of other chemical companies. In a week or two, chemical issues dropped an average of 15%.

Then, last week, Du Pont issued its report--and it became evident that Wall Street had been looking at the wrong comparison. Sure enough, second-quarter profits, at $128 million, were 7% below the first quarter--but they were more than five times greater than a year earlier. Some analysts are now estimating that Du Font's profits for all 1976 will almost double, to about $11 on each share of common stock, and then rise another 50% or so in 1977, to $17.

Quarter-to-quarter wobbles aside, it seems obvious that Du Pont has finally broken out of a decade in which its sales more than doubled--to $7.3 billion in 1975--but earnings rose hardly at all. One reason is that the recovery is increasing demand for Du Font's famous products, nylon, Dacron, Lucite, Freon, Teflon and thousands of others. Another reason is the policy of Irving S. Shapiro, who became chairman in 1973.

Shapiro took over a company that had been family managed since the days when it sold gunpowder to Thomas Jefferson and, in the new chairman's view, had been made complacent by its long record of innovations (the most famous: the invention of nylon by Du Pont Scientist Wallace Carothers in the 1930s). Says Shapiro: "There was a smugness, a feeling that we're just a little better than anyone else. It took some bitter experience to cleanse the system."

The bitter experience came with the recession. Sales of synthetic textile fibers, which account for more than a third of Du Pont's volume, soared well into the recession year of 1974, spurred by a shortage mentality created by the Arab oil embargo. A Du Pont joke at the time was that if this is what recessions are like, bring on more. But then the buying stopped, and Du Pont and other manufacturers realized that they had built heavy overcapacity and were vulnerable to sharp price cutting. Result: Du Pont's earnings fell 33% in 1975. This problem has not yet been solved: though synthetic fiber sales rose sharply in the first quarter of 1976, the gain flattened out in the second quarter, and price cutting is still going on.

Securing Supplies. Shapiro restricted research and development spending, concentrating on coming out with few products annually (half a dozen v. 25) and marketing them more heavily. A Du Pont trade show in Manhattan last week displayed numerous ways that manufacturers could use polyester fibers other than in conventional double-knit materials, which appear to be falling out of favor with consumers who have shifted back to cotton and wool. Shapiro has also moved to assure that Du Pont, a major seller of raw materials, has adequate supplies for its own operations. The company has entered into a venture with ARCO to build a $1 billion chemical refinery in Texas; Du Pont and National Distillers & Chemical Corp. also plan to build a $100 million methanol plant.

Perhaps more to the point, Du Font's department managers are being leaned on to produce profits. The near autonomy of yesteryear has been abolished through ever increasing central control. Says Shapiro: "No question, we're mean, tough s.o.b.s." The result: the giant of the Brandywine is paying less attention to laurels and more to cold cash.

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