DowDuPont Inc. (DWDP: Buy, $79 PT) 
Deep Dive Deux

• We raise our target and affirm our Buy rating. As a follow up to our initial “deep dive” report on Sept. 8, we update herein our fully integrated financial model to reflect a variety of incremental data emanating from DowDuPont’s press release and conference call on 12 September. The upshot of numerous adjustments to our model is that we trim our 2018 EPS estimate by $0.10 to $4.00, mainly due to higher than anticipated step-up amortization, and raise our sum-of-the-parts-based price target by $5 to $79 to reflect a meaningful upgrade to portfolio composition as well as a slight increase in market multiples relative to our last model revision. Thus while shares have appreciated a heady 8.3% over the past week, our analysis suggests additional total return opportunity of ~15% with a 12-month view.

• We went “under the hood” to tune up our integrated model. Significant changes include: (1) the transfer of businesses that generate $8bn in sales and $2.4bn of EBITDA to Specialty Products Co. from Materials Science Co.; (2) new segmentation; (3) re-cast of… 

• Updated portfolio composition looks good to us. We’d highlight several key takeaways from DowDuPont’s financial update on 12 September : (1) the magnitude of the portfolio shift is quite similar to that outlined in our deep dive number one (click here and see Figure 5), albeit with a somewhat different mix; (2) while constructive for shareholder value as we discuss below, the shift will bring some dis-synergies, but these are apparently not meaningful enough to alter the company’s overall targets, which were affirmed; (3) we view the Hurricane Harvey-related impact of $250mn in 3Q17 as unsurprising… 

• Looking ahead, we anticipate three additional events by year end. Following the outcome of committee recommendations regarding portfolio composition put forth to the investment community on 12 September, we expect at least three other key events by year-end: (1) receipt of pro forma financials; (2) 3Q17 earnings results; and…

• We recast our earnings estimates. We estimate that 2018 EPS for DowDuPont will be $4.00. This number is lower than the $4.10 we had penciled in previously, since we have increased our estimate for deal-related amortization and made several other changes to our model as discussed. Our estimate of $4.00 is driven by an EBITDA forecast of $19.3bn, which is composed of $11.5bn of legacy Dow EBITDA, nearly $6.0bn of legacy DuPont EBITDA, and estimated realized synergies of nearly $1.8bn. Our 3Q17 pro forma EPS estimate of $0.40 now reflects three months of legacy DOW performance plus three months of legacy DuPont results vs. only one month in the prior edition of our model.  

• We rate DWDP shares Buy with a price target of $79. Given Dow’s previously pending combination with DuPont (DD) in a merger of equals (MOE), we have been assessing the value of DOW shares using a sum-of-the parts (SOTP) framework for the combined entity, DowDuPont, including synergies. In summary, we value DWDP shares at $79, which suggests upside potential of 13%, or nearly 15% inclusive of the dividend which is yet to be determined by the company’s new board of directors (Dow’s old dividend was $1.84 per annum, which would imply a yield of 2.6%). 

“The upshot of numerous adjustments to our model is that we trim our 2018 EPS estimate by $0.10 to $4.00, mainly due to higher than anticipated step-up amortization, and raise our sum-of-the-parts-based price target by $5 to $79 to reflect a meaningful upgrade to portfolio composition as well as a slight increase in market multiples relative to our last model revision,” said Vertical Research Partners chemicals analyst Kevin McCarthy.


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