An old song tells us that "breaking up is hard to do," but it's actually been pretty painless for top chemical company DowDuPont (NYSE:DWDP). Formed through the $130 billion 2017 merger of industry titans Dow Chemical and E.I. DuPont de Nemours, the plan has always been to split into three separate entities that are more focused on particular sectors of the chemical industry.
The breakup has already begun with the March spinoff of Dow (NYSE:DOW) as a separate materials science company. The next spinoff -- of agricultural sciences specialist Corteva Agriscience -- is slated for June 1. In the interim, buying DowDuPont shares gets you a stake in Corteva as well as the remaining DuPont businesses. But is that a good deal for investors at current prices? Let's take a look and find out.
Ups and downs
From a mathematical standpoint, the March spinoff of Dow has been a net positive for DowDuPont investors. Existing shareholders received one share of Dow for every three shares they held of DowDuPont. At the time of the split, DowDuPont shares were trading at just under $37 per share, while the new Dow shares opened at $49.80 per share. Since then, DowDuPont shares have risen about 2.7%, but Dow shares have zoomed up 10.9%.
On the other hand, DowDuPont's overall performance since its September 2017 formation has been disappointing, with shares down 15.9% compared to the S&P 500's 18.7% gain during that time. This is largely the fault of the company's agricultural science unit (the soon-to-be spun off Corteva), which was hit hard in 2018 by poor crop yields due to bad weather and unfavorable currency exchanges.
However, this illustrates the appeal of spinning off the businesses in the first place. Without the ball and chain of Corteva's underperformance weighing on the materials (Dow) and specialty chemicals (DuPont) segments, they will be poised to outperform, as Dow has done post-split.
So given the recent underperformance of DowDuPont, does it make sense to buy right now?
Unlocking the value
It's tougher to put a value on the company now that the Dow businesses -- which represented about $40 billion in annual sales, or just over half of the combined company's revenue -- have been spun off. Any trailing performance metrics will, of course, include the Dow's results.
However, even with that in mind, DowDuPont's valuation doesn't make much sense. Here's a comparison of some standard valuation metrics with other major chemical specialists like material science company 3M, German chemical juggernaut BASF, and German agricultural science company Bayer AG:
DowDuPont is on the high end of its peer group when it comes to its trailing price-to-earnings ratio and its trailing enterprise value-to-EBITDA ratio. Only its trailing price-to-sales ratio looks comparatively cheap.
But remember, that price-to-sales metric includes the better than 50% of sales that were already spun off with Dow. So from a valuation standpoint, DowDuPont isn't looking like much of a bargain.
DowDuPont isn't expecting much from its Corteva unit over the next year. While management anticipates that 2019 sales will grow thanks to some key product launches and pricing changes, unfavorable currency impacts are expected to eat up most if not all of those benefits.
Once the underperforming Corteva unit is spun off, however, the remaining DuPont businesses -- including electronics, photovoltaics, nutrition, and bioscience -- should make for a strong company. This portfolio boasts some of the highest EBITDA margins of DowDuPont, including the electronics and imaging unit, which sports a 40.2% EBITDA margin.
Additionally, the high value of the new DuPont's collection of assets could offer plenty of opportunities to spin off or sell businesses that are valuable but don't contribute much synergy, like the company's nutrition division.
In short, the new DuPont is likely to be a much more compelling investment than the new Corteva, but if you buy now, you have to buy them both. And that's probably not a bet most investors will want to make.
This "in-between" period -- after the Dow spinoff but before Corteva's -- is probably the worst time to buy shares of DowDuPont. Investors won't get the benefit of the shares in Dow, but will be saddled with shares in the underperforming Corteva. And while there's a chance that the market is undervaluing the combined company, the complexity of the merger-and-spinoff deal and the uncertainty of how the new companies will fare operationally makes that a risky bet.
The bottom line: Investors are safer waiting for the final spinoffs to occur before buying in. To be doubly safe, though, investors should wait at least a few quarters to see how things are going for the three new companies and make their decisions accordingly.