Morningstar | Trimming Our DowDuPont FVE to $63 Based on Lowered Near-Term Outlook; Shares Slightly Undervalued
As DowDuPont prepares to split into three separate companies later this year, the company's materials science business will face margin compression related to lower oil prices, as management guided for first-quarter EBITDA to be down low-20% year on year. Having updated our model to account for lower near-term profits, we've reduced our fair value estimate for DowDuPont to $63 per share from $66. Our narrow moat rating remains intact.The market reacted negatively to management's tempered outlook, and the stock fell roughly 8.5% at the time of writing. We view DowDuPont as slightly undervalued on a risk-adjusted basis, as we see profit improvement in the agriculture and specialty products segment.
The Brent oil/U.S. natural gas spread is one of the most important drivers of profitability for DowDuPont's materials solutions business, which generates roughly half of total profits. Most of the company's production comes from U.S. natural gas feedstock, while marginal cost producers use oil-based naptha. As oil prices fell from over $80 per barrel at the beginning of the fourth quarter of 2018 to the mid-$50s by the end of the year, DowDuPot's materials solutions operating EBITDA margins compressed 220 basis points sequentially to 17.7%.
In the agriculture business (Corteva), China recently granted import approval to the genetically modified Enlist soybeans and Qrome corn. Last year, Enlist corn was also approved for import. By gaining import approval for Enlist corn and soybean products, we think Corteva will be well positioned to win market share in North and South America in the near-term and eventually in China over the long-term. Although China currently does not allow its farmers to plant GM corn and soybeans, we continue to point to import approval as the first steps toward the eventual opening of the Chinese market to planting GM seeds. This new market for GM seeds will create significant demand growth for these products, which should benefit Corteva.
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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