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Morningstar | DowDuPont Reports Soft 1Q Ahead of Corteva Spin; Maintaining $45 FVE With Long-Term Outlook Intact

DowDuPont reported weak first-quarter results, as delays in planting and lower volumes across most of the specialty chemicals segments weighed on profits. After updating our valuation model, we maintain our $45 per share fair value estimate and narrow moat rating for DowDuPont.

The market reacted negatively to the earnings release, sending shares down nearly 7%. At current prices, we view DowDuPont as undervalued as the company prepares to spin off the agriculture company, which will be named Corteva, on June 1. On June 2, Corteva and DowDuPont will begin trading independently and the separation phase will be complete. After June 1, DowDuPont will be renamed DuPont and will contain four specialty chemicals businesses. We will continue to cover both Corteva and DuPont.

In the agriculture business, operating EBITDA decreased 25% year on year, driven largely by 7% lower volumes as bad weather delayed the North American planting season. In its earnings release, management said that 2019 seed deliveries were on pace with those of 2018 through late April. Full-year guidance was unchanged. Because the seed business sells directly to farmers instead of to farm retailers, delays to the planting season have a greater effect on the business' quarter-to-quarter results.

The specialty chemicals business faced headwinds due to lower volumes across nearly all segments and higher raw materials prices. As a stand-alone specialty chemicals business, DuPont will face higher raw material prices when oil prices rise, as prices for the commodity chemical inputs that DuPont purchases typically move with oil prices. However, given DuPont's pricing power from its patented specialty chemicals, the company can generally raise prices to cover raw material inflation over a longer period.