The move is classic Ed Breen. DuPont’s decision to split into three publicly traded companies, announced Wednesday, is another page out of the long-time CEO’s playbook of doing whatever’s necessary to create value for shareholders. In fact, when we began buying shares of the specialty chemicals maker back in August, we said we expected Breen to take action if the stock continued to trade below the sum of its parts. Shares of DuPont were flat on Thursday, a surprising reaction to the news given what the parts of DuPont could be worth compared to its current price. We see this is an opportunity to add to our position, and are upgrading our rating to a 1. We would be buying shares if we were not restricted from trading. The rationale behind this breakup is pretty simple. DuPont has these great secularly growing electronics and water businesses that it never got any Street credit for as a conglomerate. By separating these businesses into individual publicly traded companies, the market should apply multiples closer to peers and well above DuPont’s current valuation, unlocking a lot of trapped value. Should the market continue to choose to heavily discount any of the parts, it will likely be easier for a willing buyer (larger company) to step in and acquire it. Here’s some quick and dirty back of the envelope math exercise to figure out what each business could be worth as an independent company. We’ll take a look at margins, compare them to pure-play peers in the same industry, and add it all together to get a sense of what the DuPont breakup could be worth in the future. The electronics business did about $4 billion in sales in 2023 and generated about $1.16 billion in EBITDA based on a 29% margin. It’s closest peer Entegris trades at about 24 times 2024 enterprise value-to-EBITDA (EV to EBITDA) and generated an EBITDA margin of 26.7% in 2023. In general, higher-margin businesses are deserving of a premium over its competitors, but we like to be conservative with our sum-of-the-parts exercises. Let’s say DuPont’s electronics business fetches a 10% discount to ENTG’s multiple. If we apply a multiple of 21.6 on DuPont’s business, it puts the enterprise value at $25 billion. The water business did about $1.5 billion in sales in 2023 and generated about $360 million in EBITDA based on a 24% operating margin. A close peer is Xylem , which trades at about 20.4 times 2024 EV-to-EBITDA. In this case, a big discount to XYL isn’t entirely appropriate considering Dupont’s water business has much better margins of 24% operating EBITDA margin in 2023 compared to Xylem’s 19%. So being conservative and using a 20 times multiple, DuPont’s water business could have an enterprise value of $7.2 billion. As for the new DuPont , which includes its remaining healthcare, advanced mobility, and safety and production businesses, it did $6.6 billion in sales in 2023 and generated roughly $1.584 billion of EBITDA based on roughly 24% margin. If we conservatively take off 1.2 of its current 13.7 times EV-to-EBITDA multiple and value the business at 12.5 times — which is incredibly cheap for a quality diversified industrial — you are talking about a business with an enterprise value of about $19.8 billion. Add these three up and the total enterprise value is about $52 billion. To get the equity value, we subtract the net debt (which is total debt minus cash) from the total enterprise value. DuPont ended the first quarter of 2024 with $7.776 billion in total debt and $1.934 billion in cash and cash equivalents, meaning net debt was $5.84 billion. If we subtract this from the $52 billion enterprise value, the total equity value could be worth $46.2 billion. Next, we divide the total equity value by the shares outstanding to figure out what it could be worth on a per share basis. If we divide $46.2 billion by the weighted average diluted shares outstanding of 424.3 million as of the end of the first quarter, we get an equity value per share of about $108. This is what the sum of the parts looks like and b ased on Dupont’s current price under $80, it greatly exceeds the value of the whole. Again, we like to be conservative whenever we perform a quick math exercise like this, and we understand that this breakup could take 18 to 24 months to complete. That means it will be a long time before this perceived trapped value is realized. Understandably, sometimes less patient investors get more interested in these special situations when it gets closer to the ex-date. Also, DuPont’s execution has been a little spotty in recent years and the company’s PFAS (or “forever chemicals”) liability — which will be split amongst the three new companies — has kept some investors away. There will also be an estimated $700 million in transaction costs associated with the separations. To conservatively account for these other factors, we’ll discount our valuation again to $100 per share. This is our new price target from $85 previously we are upgrading our rating to a 1 and would be buyers at current price levels. More broadly, this is another great example of how the conglomerate model of old may not be the best for shareholders. The recent breakups of General Electric and United Technologies are two recent success stories for shareholders. DuPont’s split should be another one. (Jim Cramer’s Charitable Trust is long DD. See here for a full list of the stocks.) 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Ed Breen, Executive Chair, Dow DuPont.
Adam Jeffery | CNBC
The move is classic Ed Breen.
DuPont’s decision to split into three publicly traded companies, announced Wednesday, is another page out of the long-time CEO’s playbook of doing whatever’s necessary to create value for shareholders. In fact, when we began buying shares of the specialty chemicals maker back in August, we said we expected Breen to take action if the stock continued to trade below the sum of its parts.
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