Morningstar | Chemicals Businesses Continue Driving Profit Growth for DowDuPont; We Raise Our FVE to $65. See Updated Analyst Note from 02 Aug 2018
DowDuPont reported second-quarter EBITDA of $5.7 billion, up 29% year on year driven by higher volumes in all segments and lower costs. We have increased our near-term forecast to account for a greater-than-expected rebound in the ag segment. With our long-term forecast unchanged, we increase our fair value estimate to $65 per share from $64 to account for our increased ag forecast and the time value of money effects. Our narrow moat rating for DowDuPont remains intact. With the stock trading near our fair value estimate, we view DowDuPont as fairly valued.In the ag segment, sales bounced back after a late start to the North American planting season weighed on first-quarter results. Although revenue is still down roughly 1% year on year through the first two quarters of 2018, we expect the agriculture business to catch up to 2017 level by the end of the year as DowDuPont continues to launch higher-priced products that will generate greater per-unit revenue. As a result, we increased our segment outlook and now expect sales to be flat, up from our previous forecast of a 1% decline.
In the earnings release, DowDuPont announced its intended timing to separate into three companies. Management plans to first spin off a materials science company, which will retain the Dow name, in the early second quarter of 2019. In the late second quarter of 2019, management then plans to separate the agriculture company, which will be named Corteva Agriscience, from the specialty products company, which will retain the DuPont name. Regardless of when the spin-offs occur, we continue to forecast $1.5 billion in annual cost savings synergies, versus management's forecast of $3.3 billion. The bulk of the difference continues to come from our forecast that an estimated $600 million of back office cost savings from going from two companies into one will turn into $1.2 billion in dis-synergies when DowDuPont splits into three companies.
DowDuPont is a holding company comprised of The Dow Chemical Company and E. I. du Pont de Nemours and Company with a focus on forming independent, publicly traded companies in the agriculture and specialty products sectors. The company's worldwide operations are managed through global businesses and include the following reportable segments: Agriculture; Electronics and Imaging; Nutrition and Biosciences; Transportation and Advanced Polymers; and Safety and Construction.
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