DWDP - Dow DuPont

[Spekulatius]

Anyone looking into this? The new Dow shares trade already on a when issued basis for around $50/ share. Since one will get 1 Dow share for 3 DWDP shares , that’s about $17 in value for each DWDP share or ( including JV EBITDA) roughly 5x EV/EBITDA based on Y2018 numbers. Company guided down significantly today at 20% lower EBITDA for the start of Y2019, so draw your own conclusion.

No position yet, but looking closely.

[Liberty]

Anyone looking into this? The new Dow shares trade already on a when issued basis for around $50/ share. Since one will get 1 Dow share for 3 DWDP shares , that’s about $17 in value for each DWDP share or ( including JV EBITDA) roughly 5x EV/EBITDA based on Y2018 numbers. Company guided down significantly today at 20% lower EBITDA for the start of Y2019, so draw your own conclusion.

No position yet, but looking closely.

 

It seems pretty cheap if you trust that Breen will execute on the synergies and margin improvements, and that the new incentives for better ROIC and cutting low-return investments will work. Of course, large portions of the company are cyclical and there will be down (and up) quarters like this...

[Liberty]

DOW spin is today:

 

http://www.dow-dupont.com/news-and-media/press-release-details/2019/DowDuPont-Announces-Effectiveness-of-the-Form-10-Registration-Statement-for-New-Dow/default.aspx

[walkie518]

not sure where to think the value will be? 

 

Dow itself is less appealing since the stock is rising as a stand-alone already and is included in all of the indexes? 

 

likely there will be forced selling of DWDP and the ag business...this should create more value for buyers at the bottom, but would I want to own ag chem biz?  Would I rather own specialty chem biz?

 

my feeling is that Dow itself might be the best horse though pricing will and does reflect even at a lower EBITDA multiple?

[Spekulatius]

not sure where to think the value will be? 

 

Dow itself is less appealing since the stock is rising as a stand-alone already and is included in all of the indexes? 

 

likely there will be forced selling of DWDP and the ag business...this should create more value for buyers at the bottom, but would I want to own ag chem biz?  Would I rather own specialty chem biz?

 

my feeling is that Dow itself might be the best horse though pricing will and does reflect even at a lower EBITDA multiple?

 

DOW looks cheap based on Y2018 but the way the earnings trend go, the multiple may not be that great, or at least not better than HUN or EMN any more. The AG business results look very messing, I am not sure how value it. Also keep in mind that if Roundup is really on its way out due to cancer litigation, then DWDP roundup ready seed traits will be affected too, at least they will be useless and possibly considered inferior since there is possibility that farmers still use them with Roundup, especially in foreign countries.

[vinod1]

Are the spin-offs planned right from the beginning of the merger of Dow and DuPont? Or are they a reaction to issues with the merger?

 

I have not followed this and just wanted to know the background. Can anyone help?

 

Thanks

 

Vinod

[gfp]

Yes, planned from the beginning.  Not even sure the merger would have been allowed without the separation plan

 

Are the spin-offs planned right from the beginning of the merger of Dow and DuPont? Or are they a reaction to issues with the merger?

 

I have not followed this and just wanted to know the background. Can anyone help?

 

Thanks

 

Vinod

[vinod1]

Yes, planned from the beginning.  Not even sure the merger would have been allowed without the separation plan

 

Are the spin-offs planned right from the beginning of the merger of Dow and DuPont? Or are they a reaction to issues with the merger?

 

I have not followed this and just wanted to know the background. Can anyone help?

 

Thanks

 

Vinod

 

Thanks gfp!

[Spekulatius]

Wanted to bump this one, since at around $31.5 and probably cheaper tomorrow, the sum of Corteva (seeds and AG chemicals) and the stub DuPont (special materials and chemicals) trades at around 9.5-10x EBITDA. I like them both. Corteva can be compared with Monsanto befor the Bayer merger (not quite the same quality, but close), which was bought for 16x EBITDA and stub DuPont to MMM. So, while not optical cheap, it sum of both trades at a large discount to peers.

 

There are concerns with the impact of the trade war on business, but this applies to comps too. the positive is that both DuPont and Corteva are only half way through the restructuring from the combination of DuPont and Dow, so I expect more synergies dropping to the bottom line. On top of that, we get hopefully the spin-off dynamics. I am planning to o bump this up a major (or two major) position on price weakness.

[ander]

Wanted to bump this one, since at around $31.5 and probably cheaper tomorrow, the sum of Corteva (seeds and AG chemicals) and the stub DuPont (special materials and chemicals) trades at around 9.5-10x EBITDA. I like them both. Corteva can be compared with Monsanto befor the Bayer merger (not quite the same quality, but close), which was bought for 16x EBITDA and stub DuPont to MMM. So, while not optical cheap, it sum of both trades at a large discount to peers.

 

There are concerns with the impact of the trade war on business, but this applies to comps too. the positive is that both DuPont and Corteva are only half way through the restructuring from the combination of DuPont and Dow, so I expect more synergies dropping to the bottom line. On top of that, we get hopefully the spin-off dynamics. I am planning to o bump this up a major (or two major) position on price weakness.

 

Do you think worthwhile to wait until the Corteva spin is done or does not matter at this stage?

[dwy000]

Wanted to bump this one, since at around $31.5 and probably cheaper tomorrow, the sum of Corteva (seeds and AG chemicals) and the stub DuPont (special materials and chemicals) trades at around 9.5-10x EBITDA. I like them both. Corteva can be compared with Monsanto befor the Bayer merger (not quite the same quality, but close), which was bought for 16x EBITDA and stub DuPont to MMM. So, while not optical cheap, it sum of both trades at a large discount to peers.

 

There are concerns with the impact of the trade war on business, but this applies to comps too. the positive is that both DuPont and Corteva are only half way through the restructuring from the combination of DuPont and Dow, so I expect more synergies dropping to the bottom line. On top of that, we get hopefully the spin-off dynamics. I am planning to o bump this up a major (or two major) position on price weakness.

 

Do you feel this is cheap intrinsically at this price or just cheap relative to the comps?  I haven't dug in for a long long time but just skimming, it looks like they basically just cover dividends from a cash flow basis (granted this is before all the synergy cost savings kick in).  Curious as to whether the comps are just overpriced or this is a solid return from a cash flow/growth perspective on it's own.

[Spekulatius]

Wanted to bump this one, since at around $31.5 and probably cheaper tomorrow, the sum of Corteva (seeds and AG chemicals) and the stub DuPont (special materials and chemicals) trades at around 9.5-10x EBITDA. I like them both. Corteva can be compared with Monsanto befor the Bayer merger (not quite the same quality, but close), which was bought for 16x EBITDA and stub DuPont to MMM. So, while not optical cheap, it sum of both trades at a large discount to peers.

 

There are concerns with the impact of the trade war on business, but this applies to comps too. the positive is that both DuPont and Corteva are only half way through the restructuring from the combination of DuPont and Dow, so I expect more synergies dropping to the bottom line. On top of that, we get hopefully the spin-off dynamics. I am planning to o bump this up a major (or two major) position on price weakness.

 

Do you feel this is cheap intrinsically at this price or just cheap relative to the comps?  I haven't dug in for a long long time but just skimming, it looks like they basically just cover dividends from a cash flow basis (granted this is before all the synergy cost savings kick in).  Curious as to whether the comps are just overpriced or this is a solid return from a cash flow/growth perspective on it's own.

 

It’s more based on comps than on being cheap in absolute terms. I think it would need to mature post the spinoff to really look cheap. The market assigns a relatively high multiple to a business that isn’t very economically sensitive and has a long growth runaway, albeit at moderate rates. Seed companies for example had high multiples as long as long as I can remember.

 

As far as waiting for the Corteva spin-off, it depends on individual preference. I am fine holding both, so I have no problem buying them together.

 

Dow is interesting too, albeit more cyclical. Their earnings are dependent on the differential between crude and NG, which tend to be higher when crude is higher. They are also more dependent on the economic cycle. I prefer DWDP, but I could see myself buying into DOW as well. i would regard it as a cyclical income stock. They seem to handle the recent margin pressure better than competitors, which seem to support the management thesis that they are a low cost producer.

[Liberty]

https://www.prnewswire.com/news-releases/dupont-to-present-at-electrical-products-group-conference-300853587.html

 

"Breen will note that DuPont intends to announce a $2 billion share repurchase program, subject to Board of Director approval, shortly after its transition to an independent company upon the separation of its specialty products and agriculture businesses effective June 1, 2019.  The company intends to make purchases under the plan during calendar 2019."

[Liberty]

Transcript of Breen presentation on May 21st:

 

http://s21.q4cdn.com/813101928/files/doc_downloads/2019/05/EPG-Transcript.pdf

[Spekulatius]

Transcript of Breen presentation on May 21st:

 

http://s21.q4cdn.com/813101928/files/doc_downloads/2019/05/EPG-Transcript.pdf

 

Awesome. I really like the way they are benchmarking themselves against competitors - very evident specifically in the Dow presentation. It has become one of my larger positions recently and I think it’s a good example to buy a good company with great management at a very fair price.

[colinwalt]

Loeb presentation from May 2017

 

https://www.thirdpoint.com/portfolio-updates/portfolio-update-structuring-the-new-dowdupont-to-maximize-shareholder-value/

[Spekulatius]

Transcript of Breen‘s presentation of the new DuPont Company.

 

Some really interesting tidbits about Dupont’s end markets (automotive, cell phones), capital allocation, management incentives, benchmarking etc.  Pretty low key and makes a lot of sense to me.  was with him on some of the Tyco spinoffs and I like this setup even better. I added to CVTA WI and even bought a first of DOW today. I pen already DWDP, which will disintegrate into CVTA and DD next week. I like them all.

 

http://s21.q4cdn.com/813101928/files/doc_downloads/transcript/2019/Bernstein-Conference-Transcript.pdf

[BG2008]

DuPont spiked 18% today. I don't think I can remember a $50bn company spiking 18% in one day without it reporting earnings or other fundamental news. 

[Liberty]

DuPont spiked 18% today. I don't think I can remember a $50bn company spiking 18% in one day without it reporting earnings or other fundamental news.

 

Corteva was spun off. Lots of investors apparently sold the spin and bought the remainco.

[Spekulatius]

DuPont spiked 18% today. I don't think I can remember a $50bn company spiking 18% in one day without it reporting earnings or other fundamental news.

 

Corteva was spun off. Lots of investors apparently sold the spin and bought the remainco.

 

Yeah weird trading - CVTA might be the bargain here- lots of opportunity to improve the margins. DD almost closed the valuation gap to MMM. The spike in DD shareprice from $72 to $76 towards the end of the trading session seem to be when the machines took over.

[Spekulatius]

The Q2 results are out for the remainco DD and they are a bit ho hum. While they are doing a great job on the margin end, the demand side looks not so great. Earning estimate is $3.8 so for a $69 stock, this isn’t exactly cheap. They do own some great high margin business (EBITDA margins >25%) and Capex needs are moderate , so it’d  is clearly worth following. DD‘s closest pest is MMM and I think it still trades at a modest discount to MMM.

 

I sold my DD and also CTVA stock a while ago.  Made some bucks on each. The numbers for both companies came in below my expectations, probably diente stand-alone costs (which weren’t clear based on their early investor presentations.

https://s23.q4cdn.com/116192123/files/doc_financials/2019/2019/q2/2019-08-01-2Q19-Earnings-Final.pdf

[BG2008]

The Q2 results are out for the remainco DD and they are a bit ho hum. While they are doing a great job on the margin end, the demand side looks not so great. Earning estimate is $3.8 so for a $69 stock, this isn’t exactly cheap. They do own some great high margin business (EBITDA margins >25%) and Capex needs are moderate , so it’d  is clearly worth following. DD‘s closest pest is MMM and I think it still trades at a modest discount to MMM.

 

I sold my DD and also CTVA stock a while ago.  Made some bucks on each. The numbers for both companies came in below my expectations, probably diente stand-alone costs (which weren’t clear based on their early investor presentations.

https://s23.q4cdn.com/116192123/files/doc_financials/2019/2019/q2/2019-08-01-2Q19-Earnings-Final.pdf

 

I think the $3.8 per share of EPS is a bit misleading in that the D&A is about 2x of what the maintenance Cap Ex is.  D&A is $2bn while Main Cap ex is about $1bn.  It acts as a tax shield until the amortization of intangibles run out in probably 10 years.  I've looked at Goldman's model and I generally come to the same conclusion.

 

2020

$2.8 to $2.9 billion of NI

$2.0-2.1 billion of D&A add back

Less $1 bn of Cap Ex

$3.9 to 4.0 billion of FCF

 

I have a shares outstanding of 749 and should get down to about 710-715 due to buybacks on year end 2020. 

 

So $5.5 per share of FCF give or take.  I think that the $3.8 per share includes excess D&A.  I believe that number backs out the integration cost etc.  But it doesn't make adjustments for the excess amortization of intangibles.  The excess intangible is largely due to the Dow Dupont Merger and it is now acting as a tax shield for the next 10-15 years.  But there is a $1 billion delta between the FCF and their adjusted figure.  Would love feedbacks. 

 

At a $5.5 per share of FCF figure, this is trading at 12x next year FCf per share.  18x is likely fairly valued for guys like us.  But 12x is quite cheap.  One thing that I have come to appreciate in recent years is that with very good companies, you kind of have to skate to where the puck is.  With the merger and split/spin off, there are lots of moving parts and share buybacks can dramatically increase value.

 

If we were to underwrite this name to 2.5 years out to 2021, we wind up with share count in the 700 shares range a $4bn of FCF.  That's $5.7 per share of FCF.  An 18 to 22x multiple would imply a $102 to $114 share price.  From today's $66 stock price, it's a nice 15-22% IRR over 2.5 years.  If the market re-rates the stock to 18-22x multiple by 2021, you wind up with IRRs in the 20-30% range.  Even a 15x FCF multiple by year end 2021 generates a 12% IRR. 

 

Would love feedbacks.       

 

 

[BG2008]

That $500mm of additional standalone cost is quite annoying.  The data was very much misrepresented prior to the spin.  Applying a 20% tax rate equates it to about $400mm.  At 750mm shares today, that's about $0.53 of EPS which at 18x is almost $9.54 of value.  Super annoyed by that adjustment and the way they represented the data.  That alone was 14% of the value of today's price of $66 per share.   

[Liberty]

https://finance.yahoo.com/news/dupont-considers-sale-biosciences-unit-182425104.html

 

"DuPont Considers Sale of Biosciences Unit That Could Fetch $20 Billion"

[Spekulatius]

That $500mm of additional standalone cost is quite annoying.  The data was very much misrepresented prior to the spin.  Applying a 20% tax rate equates it to about $400mm.  At 750mm shares today, that's about $0.53 of EPS which at 18x is almost $9.54 of value.  Super annoyed by that adjustment and the way they represented the data.  That alone was 14% of the value of today's price of $66 per share. 

 

Agreed on standalone cost. It is also quite higher for CTVA (the Ag chem sister company). i think you are correct about the amortization not been taken into account. They actually split the amortization into two parts apparently , the regular amortization (which isn’t backed out and runs at about $1B/ year) and a merger related amortization ( $199M last quarter), which is backed out /accounted for in the operating earnings bridge. So, that makes the valuation metrics way more appealing.

 

 

These numbers are really a mess. They even published a pro forma balance sheet in the last 10-q, what we are still numbers that include Corteva (sincerity was spin off in the middle of he quarter)