This move is typical Ed Breen. The decision to split DuPont into three publicly traded companies, announced Wednesday, is another page in the longtime CEO’s strategy of doing whatever it takes to create value for shareholders. In fact, when I started buying shares of the specialty chemicals maker in August, I said I expected Breen to take action if the stock continued to trade below the sum of the companies. DuPont shares were flat on Thursday, which was a surprising reaction to the news, given the value of each of the DuPont companies compared to the current share price. We see this as an opportunity to increase our position and have raised our rating to 1. We would have bought the shares if trading had not been restricted. The rationale behind this split is very simple. DuPont has great electronics and water businesses with long-term growth prospects that were never valued by the Street as a conglomerate. By splitting these businesses into separate publicly traded companies, the market should apply multiples closer to its peers, well above DuPont’s current valuation, unlocking a lot of potential value. If the market chooses to continue to heavily discount any of the pieces, it could make it easier for a willing buyer (a big one) to step in and acquire them. Here is a quick calculation to calculate how much each business is worth as a standalone company. Look at the margins, compare them to pure competitors in the same industry, and add it all up to get an idea of how much a DuPont split could be worth in the future. The electronics business generated about $4 billion in sales in 2023 and about $1.16 billion in EBITDA based on a 29% margin. Its closest peer, Entegris, trades at about 24x its 2024 enterprise value to EBITDA (EV to EBITDA) and generated 26.7% EBITDA margin in 2023. Generally, higher margin businesses are worth a premium over their competitors, but we want to be conservative in our sum of the parts calculation. Let’s say DuPont’s electronics business is a 10% discount to ENTG’s multiple. Applying 21.6x to DuPont’s business gives it an enterprise value of $25 billion. The water business would have 2023 sales of about $1.5 billion and EBITDA of about $360 million based on a 24% operating margin. A close competitor is Xylem, with a 2024 EV/EBITDA multiple of about 20.4x. In this case, the large discount to XYL is not entirely appropriate, given DuPont’s water business’s 2023 operating EBITDA margin of 24% versus Xylem’s much better 19%. Thus, using a conservative 20x multiple, DuPont’s water business could have an enterprise value of $7.2 billion. The new DuPont, including the remaining healthcare, advanced mobility, and safety and production businesses, would generate 2023 sales of $6.6 billion and EBITDA of about $1.584 billion at a margin of about 24%. A conservative 1.2x subtraction from the current EV/EBITDA multiple of 13.7x, valuing the business at 12.5x, which is very cheap for a blue chip diversified industry, would give an enterprise value of about $19.8 billion. Adding these three together gives a total enterprise value of about $52 billion. To get equity value, subtract net debt (total debt minus cash) from total enterprise value. DuPont ended Q1 2024 with $7.776 billion in total debt and $1.934 billion in cash and cash equivalents, giving net debt of $5.84 billion. Subtracting this from the $52 billion enterprise value gives a total equity value of $46.2 billion. Next, divide the total equity value by the number of shares outstanding to get a per share value. Dividing $46.2 billion by the weighted average diluted shares outstanding at the end of Q1 of 424.3 million gives an equity value per share of about $108. This is the sum of the parts, and considering DuPont’s current stock price is less than $80, it is significantly more than the whole is worth. Again, we are always conservative when doing quick calculations like this, and understand that this separation could take 18-24 months to complete. That means this perceived trapped value will take a long time to be realized. Naturally, as the vesting date approaches, less patient investors may become more interested in these special situations. DuPont’s performance has also been somewhat volatile in recent years, and the company’s PFAS (or “forever chemicals”) liabilities (which will be split into three new companies) have alienated some investors. Also, transaction costs associated with the separation would be an estimated $700 million. Taking these other factors into careful consideration, we are again discounting the valuation to $100 per share, which is our new price target from $85 previously. We are raising our rating to 1 and would be a Buyer at current price levels. More broadly, this is another great example of how the old conglomerate model may not be in the best interest of shareholders. The recent splits of General Electric and United Technologies are two recent success stories for shareholders. The split of DuPont should be another. (Jim Cramer’s Charitable Trust holds DD. See here for a complete list of shares.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes any trades. Jim will buy or sell stocks in the Charitable Trust’s portfolio 45 minutes after sending a trade alert. If Jim talks about a stock on CNBC television, he will execute the trade 72 hours after issuing a trade alert. The Investment Club information above is subject to our Terms of Use and Privacy Policy, as well as our Disclaimer. Receipt of any information provided in connection with the Investment Club does not create any fiduciary duty or obligation, nor can it be guaranteed any particular results or benefits.
Ed Breen, executive chairman of DowDuPont.
Adam Jeffery | CNBC
This move is a classic Ed Breen move.
DuPont’s decision to split into three publicly traded companies, announced Wednesday, is another chapter in the CEO’s longtime strategy of doing whatever it takes to create value for shareholders.Indeed, when we started buying shares in the specialty chemicals maker in August, we said we expected Breen to take action if the stock continued to fall below the sum of its parts.
