DowDuPont: Down But Not Out

Summary

• The company recently reported Q4 2017 results that beat the consensus revenue and earnings estimates.
• The stock is down on a YTD basis but I believe that it would be wise for long-term investors to use any pullbacks as buying opportunities.
• DWDP shares are a long-term buy at today's price.

On February 1, 2018, DowDuPont (DWDP) reported Q4 2017 financial results that beat analysts' top- and bottom-line estimates, but the company's stock was pulled down with the broader market selloff.

DWDP Price data by YCharts

DWDP shares also have underperformed the S&P 500 over the last year, but I expect for this to change in 2018 and for the company's stock to be a market beater over the next two years. To this point, I believe that DowDuPont is now in a position to create a tremendous amount of shareholder value over the next 18-24 months and, in my opinion, the company's latest results/guidance showed me that my investment thesis is still intact.

The Company's Q4 2017 Results And Forward Guidance Point To A Strong 2018

For Q4 2017, DowDuPont beat the consensus revenue and adjusted EPS estimates by ~3% and ~24%, respectively. Management also increased the merger-related cost synergy estimate by 10% (from $3.0B to $3.3B). Moreover, this newly created entity saw a nice uptick of ~13% in net sales when compared to the prior year (on a pro forma basis), which was a result of broad-based growth almost across the board, with Materials Science being the real standout (Q4 2017 sales up ~15% and operating EBITDA up ~56%).

Source: DowDuPont's Q4 2017 Earnings Press Release

DowDuPont's top-line numbers were extremely impressive, as the company's net sales growth was driven by both volume and price increases in each of the operating segments.

Net income, on the other hand, left investors wanting more. As expected, the company's net income was down big (over 50%) due largely to merger-related charges (i.e., restructuring charges, amortization of intangible assets, etc.) but it is important to remember that these are short-term headwinds. In addition, restructuring charges are typically front-end loaded so there should be less noise in the numbers as the company progresses through 2018/2019.

Below are some of the other highlights from the Q4 2017 results:

Source: DowDuPont's Q4 2017 Earnings Slides

DowDuPont's Q4 and full-year 2017 results were encouraging from a long-term investors' perspective, but, in my opinion, the company's future looks even brighter. For Q1 2018, management guided for net sales to be in the range of $20.5B-$21.3B and quarterly operating EBITDA to be in the range of $4.6B-$4.8B. Management did not provide fiscal 2018 financial guidance but they did provide ranges for both full-year sales and EPS.

Looking ahead, I believe that all signs point toward this company having a strong fiscal 2018 from an operational standpoint. Moreover, DowDuPont should have positive momentum heading into 2019, which, in my opinion, will be the year that the real shareholder value will be created.

The Catalyst

This company has several significant catalysts in place that could help propel DWDP shares higher over the next two years, but I believe that the intended asset spinoffs are on the top of that list (followed closely by the recently approved tax reform bill). During the Q4 2017 conference call, management provided additional details for intended spinoffs with the first one (Material Science) expected to be completed by the end of Q1 2019.

Management appears to be laser focused on properly positioning these business units for the upcoming spinoffs so this, coupled with the increased cost synergy projections, should bode well for DowDuPont and its shareholders through at least 2019. It also helps that the company is trading at a reasonable valuation when compared to its industry.

Source: Fidelity

Let us also not forget that the market is trading at elevated levels so the ~17x forward earnings estimates are not as rich as one might think.

Source: Wall Street Journal

I have a 18-month price target of 82, which is ~17% higher than today's price. Plus, my estimate does not factor in management's recently released expectations for positive (and improving) business environments for most industries that DowDuPont's operates in (I will be providing a deeper dive for each operating unit in the weeks ahead). Simply put, there's a lot to like about DowDuPont at current levels.

A Proven Guy Is Leading The Charge

DowDuPont's CEO, Mr. Ed Breen, has a proven track record for being able to unlock value by dismantling large companies, with the biggest example being his time at Tyco International. As CEO of Tyco, Mr. Breen sold over 100 businesses and conducted several asset spinoffs. But, more importantly, his actions at Tyco created a great deal of value for the company's shareholders (read more about his value creation efforts here).

Mr. Breen is charged with evaluating the newly combined DowDuPont and splitting the company in a way that creates long-term sustainable value and this is a job that he has done well in the past. This is why I believe that Mr. Breen is the perfect man for DowDuPont at this point in time. As Jim Cramer recently told his Action Alert members, investors should bet on DowDupont being a winner simply because Mr. Breen is leading the charge. It does, however, help that Mr. Breen has a great set of assets to work with at DowDuPont.

Risks

A broader market selloff will cause downward pressure for DWDP shares. However, I do believe that the intended spinoffs and above-average dividend should help form a base for the stock price.

Additionally, there's integration risk and other risk factors related to the spinoffs that investors will need to monitor over the next two years. It is not a given that the integration of the DowDuPont assets will go without a hitch, or that the spinoffs will go exactly as planned, so this is something that I would watch closely throughout 2018 and 2019.

Bottom Line

DowDuPont has quickly become one of my largest holdings in the R.I.P. portfolio, and it is a position that I plan to also grow in 2018. The company's Q4 2017 results were good from top to bottom, but the impressive forward guidance was the most encouraging part of the earnings release.

Most of DowDuPont's operating segments already are performing well in the current environment and many pundits are predicting for the global economy to improve over the next year so this company is indeed in a great position for 2018. Moreover, the company is in the early stages of realizing the true potential of the recently completed merger, so I believe that all of the good news is not yet priced into the stock. As such, long-term investors should use the noise (and broader market pullback) as an opportunity to add to their long-term positions in a company that has promising business prospects over at least the next two years.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long DWDP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.