DuPont Is Well-Positioned For The Future

Summary

• DuPont's stock has underperformed the broader market since Corteva was spun off (the last of the Dow-DuPont spin-offs).
• However, DuPont is well-positioned for the future and I believe that DD shares will outperform the broader market over the next 18-24 months.
• I hold a sizable position in DuPont and I have no plans to sell any shares in the near future.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Get started today »

DuPont de Nemours (NYSE:DD) is a stock that keeps giving - giving pain that is, as DD shares are down significantly since the last business, Corteva (CTVA), was spun out of the old DuPont-Dow in early June 2019.

Data by YCharts

While the stock has not performed well lately, I still believe that DuPont is well-positioned for the future and that DD shares are attractively valued at today's price. Moreover, DuPont's thesis appears to be still intact, so investors should expect for DD shares to change course and outperform the market over the next 18-24 months, especially if the asset sale rumors come to fruition.

The Thesis Is Intact

DuPont is a newly created diversified, multi-industry company that has a promising portfolio of businesses.

Source: DuPont's Analyst Day Presentation

DuPont will definitely benefit from a strong (and improving) economy, but in my opinion, this management team also has the company in a position to maintain even in a soft macro environment (a valid concern at this point in time). To this point, during the most recent conference call, management told investors that they were encouraged by the synergy (revenue and cost) progress that has been achieved and that they still fully expect to deliver on improving the company's operating leverage. Additionally, let's not forget that DuPont still has a strong (and improving) cash flow profile.

It also helps the bull case that DuPont is performing well when compared to the company's peer group.

Source: DuPont's Analyst Day Presentation

At the end of the day, I believe that DuPont is well-positioned for 2020 and beyond. The management team is still working through the merger-split, but I believe that this company has multiple levers to pull to create shareholder value in the years ahead. And while the latest operating results were nothing to write home about, I do believe that they show that this company is better positioned the further that you are able to look out.

The Latest Q2 2019 Results

On August 1, 2019, DuPont reported Q2 2019 results that beat the consensus bottom-line estimate but that missed on the top line. The company reported adjusted EPS of $0.97 (beat by $0.15) on revenue of $5.47B (missed by $160M).

Source: Q2 2019 Earnings Presentation

Management mentioned that the company's top line was negatively impacted by its short-cycle business, coupled with weaker-than-expected overall market conditions. More specifically, lower volumes and currency headwinds greatly impacted DuPont's quarterly results.

Additionally, the company cut its full-year sales guidance (now expects for organic sales to be "slightly down" vs. the previous 2-3% estimated growth) but management still expects for adjusted earnings to be in the range of $3.75-3.85 (vs. the consensus analyst estimate of $3.80).

Source: Q2 2019 Earnings Presentation

The trade wars are already having a real impact and, looking ahead, management expects for prolonged weakness in the short-cycle businesses, specifically automotive and semiconductors. DuPont's next few quarters will likely not be smooth sailing but I believe that most of the concerns are already baked into the stock price. Plus, a significant catalyst may actually come to fruition sooner rather than later.

A Soon-To-Be Catalyst?

The latest business portfolio rumors revolve around DuPont's Nutrition & Biosciences ("N&B") division. According to Bloomberg, DuPont is seeking to offload its N&B division in a deal that could fetch a valuation around $25B. There is no denying that the N&B division is a promising business to have in the fold, as shown by the organic sales and adjusted operating EBITDA growth in the prior year.

Source: DuPont's Analyst Day Presentation

But let's consider this - the N&B division's net sales and adjusted operating EBITDA accounted for approximately 30% and 25%, respectively, of the company's consolidated results in 2018 and DuPont expects to receive a valuation that is close to 46% of DuPont's total market cap. Anyway you slice it, a N&B sale for the price being floated will be a positive development for shareholders, in my opinion.

Valuation

Based on Morningstar's fair value calculations, DuPont's stock is trading at a steep discount when compared to two peers.

Source: Morningstar

And Seeking Alpha's valuation ranking tells a similar story.

It is hard to deny the fact that DD shares are attractively valued at today's price but investors need to ask themselves if the risks are already factored into the stock because it is looking more and more likely that the economy may cool down at some point in the next 18-24 months. In my opinion, DuPont's management team has enough levers to pull to navigate this global company through a slowdown and I believe that a tremendous amount of shareholder value will be created over the next 2 years if a downturn does not happen.

Risks

A recession and a broader market selloff will cause downward pressure for DD shares. However, I do believe that the [potential] asset sales (there are other asset sales that are rumored or that have already been announced) and the company's multiple shareholder-friendly initiatives should help form a base for the stock price.

Additionally, there're integration risk (Dow-DuPont business combo) and other risk factors related to the potential asset sales that investors will need to monitor over the next two years.

Bottom Line

DuPont's stock has not performed well since the merger/spin-offs but I believe that the company's future appears bright. The trade wars and other macro concerns are creating headwinds but I believe that the management team (remember, Mr. Ed Breen is still Chairman of the board) has the company well-positioned for the next few years.

Additionally, I believe that the company's story will only continue to improve as we progress through 2020 and beyond. The cost and growth synergies will create value, but, in my opinion, the potential asset sales will be the real value creators. This company will likely shrink to grow. Therefore, long-term investors should treat any pullbacks as buying opportunities.

Disclosure: I am/we are long DD, CTVA. 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.