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Here's How to Take Advantage of the Peeling Onion that is DowDuPont

Anticipated by the market since the mega-merger of Dow and DuPont in 2017, the three-way split will take its first step with the separation of Dow, Inc. (DOW) on April 1, 2019. As a result, DOW will enter the S&P 500 Index (replacing MetLife's Spinoff Brighthouse Financial, BHF), and DWDP continues down its break-up path to June's distribution of Corteva, Inc. (CTVA).

The Edge View...
DWDP (Parent, ex-Spins): We remain positive on DWDP (ex-DOW & CTVA) considering its higher margin profile compared to the other businesses included in the combined DWDP (FY18 adjusted of 28.4% vs. DOW’s 18.3% and CTVA’s 14.5%) and higher than its peers’ average in most of its business segments (please refer to page 2 for details). Additionally, DOW’s separation will reduce DWDP’s exposure to volatility in raw materials, which has adversely impacted the company’s earnings. DWDP’s post-Spin leverage will be manageable at 1.6x in FY19E, below its peers’ average of 1.8x.

DOW (Spinoff 1): On the other hand, DOW will be a longer-term investment play primarily on the expected cost savings (~$800m in FY19E) coupled with higher capital return via dividends (average dividend yield of 2.4%) and share buybacks (worth $3bn). Although DWDP will transfer ~50% of its debt to DOW, we believe this does not pose a concern as DOW will have a leverage of 1.5x in FY19E, below its peers’ average of 1.7x. However, we believe being a commodity company levered to olefins/polyolefins, DOW may see near/medium-term selling pressure on its listing, thereby creating a lower entry level for investors.

CTVA (Spinoff 2): CTVA will be a pure-play on agriculture with just one listed peer, FMC Corp (FMC), which has FY18 revenue of $4.7bn and a market cap of $9.9bn, much lower than the expected FY18 revenue of $14bn and $22bn implied market cap for CTVA. Furthermore, we believe the planned product launches and inorganic growth may create top-line growth opportunities in the long-term. Considering the M&A trend in the industry in recent years, we also see the potential for CTVA to be taken over in the longer term.

Major Insider Purchase...
On August 8, 2018, value creator and DWDP’s CEO Ed Breen, bought shares in the open market for the very first time in DWDP, buying 29,580 shares @ $67.61. This totals close to $2 million. This was an +8% increase and brings his total amount of shares to 364,232 of DWDP. The last insider buy since Dow Chemical and DuPont merged together on August 31, 2017 came from Dennis Reilley (Director), who bought twice. Once on October 18, 2017 (270 shares) and again on October 24, 2017 (15 shares) around the $70 mark, spending in total $20K. However, these purchases were quite small versus the +38,000 shares he held previous to those buys.