Morningstar | DowDuPont Reports Solid 3Q Profits as Businesses Prepare to Separate; Raising RVE to $66
DowDuPont reported strong third-quarter results as operating EBITDA grew 19% year on year to $3.8 billion. This performance was led by lower costs and higher profits in the specialty products business and the performance materials and coatings segment within the materials science business. With our outlook largely unchanged, we're increasing our fair value estimate to $66 per share from $65 due time value of money effects for narrow-moat DowDuPont.The market reacted positively to the earnings growth and management's increased cost synergy estimates, sending shares up 8% for the day. At current prices, we view DowDuPont as slightly undervalued.
In the performance materials and coatings segment, operating EBITDA grew 37% year over year to $2.5 billion. This was driven by pricing gains in excess of cost increases due to an elevated spread between brent oil and natural gas. While we expect the elevated spread to remain in place over the next couple years, we continue to forecast that oil prices will fall from their current levels around $80 per barrel to $60, while we forecast U.S. natural gas prices will fall by a smaller degree from $3.20 per MMBtu to $3.00. As a result, we expect margin compression in the performance materials and coatings segment as well as the other two segments in the the materials science business. This is because basic chemicals prices tend to move in line with oil prices as oil-based naptha tends to set the marginal cost of production for many basic chemicals.
DowDuPont remains on track to separate into three separate businesses during the second quarter of 2019. Although management increased its annual cost savings synergies estimate by $300 million to $3.6 billion, we remain skeptical that the company will be able to achieve this level of cost savings. We estimate that $1.2 billion in dis-synergies will come from operating three businesses instead of one. We point to the separate IT systems as an example of the additional costs.
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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