DowDuPont: Meet the New DuPont

DowDuPont is about to split into three very different entities. Here's what you need to know about the new DuPont.

Motley Fool Staff
Motley Fool Staff
Apr 22, 2019 at 2:20PM
Energy, Materials, and Utilities

Over the next few months, DowDuPont (NYSE:DWDP) will split into three companies, one focused on basic materials, one on finished products, and one on agriculture.

In this segment of Industry Focus: Energy, Motley Fool's Nick Sciple and Fool.com contributor Lou Whiteman profile the new DuPont, including its growth prospects and capital needs. Whiteman and Sciple will also discuss the unit's eye-watering margins and the potential for further breakups and corporate engineering once DuPont is out on its own.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 11, 2019.

Nick Sciple: Lou, let's move on now to DuPont. This is the specialty products part of the business there. That's the part of the business that Ed Breen is coming along with to run. What should investors know about this new DuPont and what it's going to look like?

Lou Whiteman: This is more of a finished-product business. They have exposure to a lot of different industries. Nutrients, from your protein smoothies to just supplements in packaged products. Electronics, transportation, adhesives, safety, construction, imaging. This is the applied chemistry business that, again, was part of both companies but not necessarily a dominant part of either. Again, the logic is, create a larger, better company that has more scale and more exposure to different businesses.

They're going to have some higher R&D than, say, the commodity business. They also, hopefully, are more profitable. Of the three businesses, they are by far the most profitable in terms of EBITDA margins. Margins, I think, 32% in the fourth quarter, compared to maybe 8% to 10% on the ag and mid-teens on the Dow, from memory.

There's a lot of different cyclical exposure here because they are in so many different businesses, but that also can be a plus for them because, barring a global recession, as long as there is growth somewhere, they can ride out storms. I think in the last quarter, the margins on electronics were something north of 50%, but that wasn't growing that fast; safety construction, lower margin, but it was a huge grower. This is a business that is set up, at least, to have a lot of different ways to win, and exposure to a lot of different markets. Again, it's now going to be a larger portfolio of products. You can spread the R&D over a larger base than you could either for Dow or DuPont as an independent and make a run at it that way.

Sciple: Yeah, Lou. With Ed Breen coming along, we mentioned as we prepared for this show that we could see some further splits. That's something that Breen did at Tyco -- splits, then subsequent splits thereafter. What opportunities might there be for the company to realize value there from additional splits within this new DuPont?

Whiteman: Right. And Tyco was a master...well, involved in everything. 'Master of everything' may be too much to say. But, yeah, he actually split that business three ways, then split the part he stayed with three ways. There were all sorts of divestitures and merges from there.

I don't know if we'll see another three-way split. But, definitely, some of the activists that were involved -- Dan Loeb was involved with this. He was hoping for more of a split of DowDuPont, maybe six ways or so. A lot of that extra stuff that he saw as maybe being viable candidates on their own came from this portfolio. I think the nutrition business, I would almost bet that we'll see an IPO or split of that sometime the next couple of years. That nutrition business is sort of a stand-alone, and it's growing. It's got some of that same potential we talked about with ag.

I would be shocked if this portfolio isn't revamped over the next couple of years. Hopefully for the best. Again, at that point, you have to trust the managers. Hopefully with Breen's experience, he can do it again. But this business is, just by the nature of it, with its different areas of expertise, and there's not necessarily synergies between a nutrition add-on and the electronic displays, there's a lot of logic in trying to create more value over time by breaking this down further.