*DowDuPont (DWDP) was formed in a merger August 31, 2017 between Dow Chemical and DuPont.
*The company is spinning off several divisions of its business to form three separate companies.
*Financials and industry comparisons imply that DWDP trades 25% below peers as of the close December 14th, 2017.
*Significant institutional interest in 13F filings.
*Conclusion and Risks
January 21, 2014 Dan Loeb’s Third Point Capital purchased a $1.3 billion stake in Dow Chemical, urging the company to spin off its Petrochemical Arm. Over the next 3 years, the ambition of making the company more efficient and returning value to shareholders turned into a widely anticipated merger between Dow Chemical Co. and E I du Pont de Nemours & Co. After legal concerns and sorting out anti-trust legislation, the merger of equals moved forward and was finalized August 31, 2017, creating DowDuPont (DWDP). According to the September 1, 2017 press release by the company, part of the legal stipulations to push the merger while maintaining compliance with anti-trust laws (which simultaneously would be unlocking shareholder value), it was agreed that DowDuPont would spin off three companies. These three companies included: “A leading Agriculture Company,” “a leading Materials Science Company, to also be named Dow,” and “a leading Specialty Products Company,” within 18 months of the merger. The ratio of these spin offs (whether they will be 1 share in each company for every share owned) is presently unknown and transition teams, as well as financial analysts are crunching the data to see if the company can spin off even more companies. Not cited is rumor that Third Point Capital suggested as many as 6 companies to be spun off at one point.
Chemical Producer sales amount to a $5+ trillion industry globally. DowDuPont (DWDP) is one of the leaders in the sector with much of the conglomerate’s growth coming internationally from Emerging Markets. An interesting point is the company’s profit in Emerging Markets comes from Mergers and Acquisitions by local companies of subsidiaries that DuPont’s side of the business sets up in countries like India and China. Following the M&A activity, profit sharing arrangements are made, and these deals are especially common in DuPont’s plastics and materials business.
The following are the financials compiled by GuruFocus and based on September 2017 Quarterly Reports.
As of today, DowDuPont Inc’s share price is $70.32. DowDuPont Inc’s Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Sep. 2017 was $2.08. Therefore, DowDuPont Inc’s P/E ratio for today is 33.81.
During the past 13 years, DowDuPont Inc’s highest P/E Ratio was 115.37. The lowest was 6.30. And the median was 15.85.
As of today, DowDuPont Inc’s share price is $70.32. DowDuPont Inc’s EPS without NRI for the trailing twelve months (TTM) ended in Sep. 2017 was $2.09. Therefore, DowDuPont Inc’s PE Ratio without NRI ratio for today is 33.65.
During the past 13 years, DowDuPont Inc’s highest PE Ratio without NRI was 173.06. The lowest was 6.32. And the median was 15.85.
During the past 12 months, DowDuPont Inc’s average EPS without NRI Growth Rate was -66.80% per year. During the past 3 years, the average EPS without NRI Growth Rate was -1.50%per year. During the past 5 years, the average EPS without NRI Growth Rate was 29.20% per year. During the past 10 years, the average EPS without NRI Growth Rate was 11.50% per year.
During the past 13 years, DowDuPont Inc’s highest 3-Year average EPS without NRI Growth Rate was 106.30% per year. The lowest was -61.40% per year. And the median was -0.80% per year.
What can be concluded from this information is that present PE ratios are double their average by comparison of the last 13 years. This multiple has increased likely due to buying pressure from Funds ahead of the spin offs mentioned earlier. One metric that is being heavily overlooked is the Price to Sales ratio. Price to Sales, according to a November 29th 2017 article by the “Post Analyst” is near 0, and this would make sense if small mergers in Emerging Markets are accounting for a good portion of DowDuPont’s (DWDP) business. This means the expenses for the profits that DowDuPont (DWDP) is making are not a factor in its valuation. Wall St. consensus has a high price target at $90 per share. The interesting part is that this business is going to be spun off and therefore will have a low expense rate, boosting the subsidiary’s price per share by significantly greater multiples.
The website, WhaleWisdom.com has compiled the 13F Filings for DowDuPont (DWDP) for advanced analysis. 13F Filings are made by Hedge Funds and institutional investors and are a regulatory requirement by the Securities Exchange Commission. According to the site, there are 1,555 institutional holders, 126 of which are placing the stock in their top ten holdings. There is an aggregated 1.6 billion shares designated 13F invested by these institutions as of September 30th, 2017 with an indication that purchasing by this investor class is trending upward.
Conclusion and Risk Management
DowDuPont (DWDP) is in a unique situation that offers outsized returns for a company of its size. Some considerations to make is to follow when the cut-off date for conversion of shares in the new company occurs. It is important to continue reading and checking up on this company for that date if you are making an investment play in this stock. While it is improbable, the result of an impasse to spin off portions of the company can cause volatility in the share price, as well as extend the holding time required to capitalize on the merits of this investment. As always, investments carry risk and money can be better deployed elsewhere in the event time horizons are extended. Since taking this position, Third Point Capital has held shares for over 3 years to get to this point and the investment horizon is going to end up being around 5 years or greater during a bull market. A lot of investors are concerned with downside risk, however opportunity cost is also something that should be considered especially when comparing an investment to their respective benchmarks. In the case of DowDuPont (DWDP), I am partial to the opportunity cost and risk levels being lower than the average investment opportunity. Based on the financials, DowDuPont (DWDP) will likely outperform the S&P 500 for the same period offering outsized returns to investors who participate in the spin offs.
Disclaimer: The author’s opinions are his own and not to be taken as investment advice and strictly as reporting on information from sources and offering his opinion to invoke conversation. The author is not a registered financial advisor or associated with a FINRA member firm at this time. The author owns shares in DWDP, RA, BKCC, BXMT, and actively trades Bitcoin, Ethereum, and Litecoin, while holding IOTA. The author also maintains a net short position via Put Options on UVXY.
Steven J. Bodnar
Contributor, Stock Market Revolution
Co-Founder/Financier, Braxxis Partners