As America Goes, So Goes DuPont
We remain bullish on the American economy, and particularly on basic industries. America's GDP is doing better than that of other major countries. We believe GDP and industrial production will be mild-to-strong the next couple of years, as long as unemployment hovers at 4% or less. DuPont de Nemours, Inc. (NYSE:DD) is typical of the American industrial base. We assess the stock as a Hold opportunity for reasons we find compelling. DuPont can become a Buy opportunity when the price slips again into the $65 range from $76.78 where it closed recently. That can require some investor patience.
At this time, we believe DuPont rates a Hold rating because of the stock's volatility, insiders, and hedge funds have been selling, revenue and earnings are forecast flat for the year, and the catalysts for the recent price spike have more to do with incentives than actual financial growth.
U S industrial production waxes and wanes Y/Y and so does the DuPont stock price. Economist Liz Ann Sonders interprets her chart to demonstrate the "index remains out of recessionary territory for now." That is good news for DuPont.
DuPont's share price waxes and wanes, as well. DuPont's stock sold at ~$64 per share in May '23. By August the stock hit a 52-week high then collapsed near to $61 in February '24. The shares climbed this week near their 52-week high of +$78. DuPont's stock volatility Beta rating over 24 months of 1.06 is high but in line with peers' average of 1.10 for 24 months.
Profile
DuPont claims to target R&D and sales of technology, materials, and specialty chemicals. Its products target electronics, semiconductors, and industrial manufacturers. The company sells to clean water and sustainability companies and agencies, aerospace and automotive manufacturers. Products are sold under dozens of brand names.
Risks
We do not find a particular catalyst for the February '24 spike in the share price from $61.21 to nearly $77 in April. There were no announced major strategy changes or financial breakthroughs in Q4 '23 driving the growth of revenue, operating EBITDA, cash from operations, or adjusted free cash flow; in fact, all were in negative territory.
The catalyst for the price bounce was the announcement of a $1B share buyback including $500M at an accelerated pace, a debt paydown of $300M, and a 6% hike in the dividend. These are short-term incentives, but do little for long-term growth and maintaining momentum. We expect the share price to slip under $70 eventually, which is a price opportunity. The dividend was raised, but the yield hovers around 2%; that will not attract investors. The dividend payout ratio is about 130% and with revenue and earnings flat to lower going forward, we expect this ratio to move into a danger zone; lower earnings can be a threat to dividend increases and payouts for the next couple of years if earnings are worse than expected. The dividend payments have been troublesome in the past.
If Q1 '24 revenue and earnings are reported lower on May 7, '24, the EPS will come in around 65 cents compared to $0.84 Y/Y despite management's launch of a $150M slash in cost savings. Any negative macroeconomic factors or events might tip DuPont's revenue and earnings below expectations, and the share price can tumble.
China and Europe present risks. They are important markets for DuPont. The Financial Times reports German industrial production is accelerating faster than at any rate for a year. But China is facing tougher times and Mordor Intelligence indicates that the U S materials and specialty chemical markets will annually grow slowly at a CAGR of 3.7% and 3.3%, respectively, over each of the next few years.
S A metrics highlighting DuPont's Growth indicate gaps between Dupont's performance and the Materials sector median. Y/Y revenue growth for DuPont is -7.29% compared to the sector median -5.84%. Revenue growth forward reveals a bigger gap, i.e., -10.36% versus -7.36%. EBIT growth for DuPont is -1.42% whereas the sector median is a positive 2.19%. DuPont's operating cash flow growth is a shining exception at 226.19% compared to 4.16% for the sector median.
Valuation
DuPont's return over 5 years is a mere 4% compared to 5 peers with an average return of 40% over 5 years. However, Du Pont's return in '23 was almost 12% versus the 5-company average of 20.4%. It shows some improvement in the face of industry headwinds. To us, the low valuation grade suggests investors have confidence in DuPont.
Here are the valuation metrics from SA that need to improve for us to move to a Buy rating from Hold:
- The TTM PE GAAP is ~70 to the materials sector median 21.76 and 34.21 to 18.79 FWD.
- EV to Sales is 3.17 for DuPont versus 1.69 for the sector median TTM.
- EV to EBITDA TTM is 13.41 to 10.12 which is ok but FWD the metric turns lower.
- Price to Sales TTM and FWD are negative at 2.84 to 1.35 and 2.64 to 1.37.
- Price to Cash Flow also has D+ grades TTM and FWD.
Another risk we find is that hedge funds and corporate insiders have been selling shares. The funds sold close to half a million shares last quarter on the rise in share price. Insiders sold $171K worth. The number of hedge funds owning the stock dropped steadily from 59 at the end of 2021 to 39 in December 2023.
Takeaway
In our opinion, the stock will move back and forth between $73 and $80 per share over the next 6 to 8 months and dip to the mid-$60s depending on financial and employment news. We believe DuPont is a healthy company in a basic industry of the American economy. Though it has $7.85B in debt, the debt-to-equity ratio is reasonable at ~22%, cash flow covers the debt, and EBIT covers the interest payments. For retail value investors, DuPont is a safe bet on long-term stability, but we concur with the S A Hold Quant Rating judgment call at the current price.
Harold Goldmeier
I write for retail value investors who cannot afford to lose money but sometimes like to take a risk. I speak for free to community and school groups. I was teaching business, social/political activism, and Middle East politics to international university students in Tel Aviv b4 the pandemic hit. A college in Jerusalem hired me to teach business and American Politics beginning in the fall of 2023. I consult with startups and mid-level companies. I co-manage Goldmeier Investments LLC with my son Daniel. I founded the Sappanos Decorating Centers, Chicago, with more than 70 employees and real estate holdings in excess of $15m. I am a former Research and Teaching Fellow at Harvard and Assoc. Prof Tufts Medical School.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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