Shares of DuPont de Nemours Inc. rallied Monday after Deutsche Bank got back to being bullish, as the stock is now trading at a substantial discount to the materials science company’s peers following its recent underperformance.
Since Jan. 17 — when analyst David Begleiter downgraded the stock to hold — through Friday, the stock
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had dropped 14.2%, while the Materials Select Sector SPDR exchange-traded fund
XLB,
had lost 5.8% and the S&P 500
SPX,
had gained 3.4%.
“As a result, DuPont’s shares now trade at a 50% discount to its peers,” Begleiter wrote in a note to clients.
On Monday, DuPont’s stock bounced 2.7% in midday trading, after closing Friday at its lowest price since Nov. 7, 2022.
Begleiter raised his rating back to buy from hold, while lifting his stock-price target to $80 from $70. The new target implies about 22% upside from current levels.
FactSet, MarketWatch
He said he believes there are two primary reasons DuPont’s stock was trading at such a deep discount to its peers. First is the uncertainty caused by all the portfolio changes that have occurred since 2015, when the DuPont and Dow Inc.
DOW,
merger was announced.
Dow and DuPont merged in 2017 and then split into three companies — DuPont, Dow and Corteva Inc. — in 2019. DuPont merged its nutrition and biosciences business with International Flavors & Fragrances Inc. in 2021 and sold its mobility and materials business to Celanese Corp. in 2022.
In November 2022, DuPont paid a $162.5 million fee for terminating its deal to buy Rogers Corp. And earlier this month, DuPont announced a $1.75 billion deal to buy Spectrum Plastics Group from AEA Investors.
“This large amount of [mergers and acquisitions] and portfolio change has resulted in some investors choosing not to spend their time looking at DuPont,” Begleiter wrote in a note to clients.
The good news, Begleiter said, is that it appears the company is done with M&A for a while.
“[O]ur leaning right now is nothing else on the radar screen over the next year on the M&A side,” DuPont Chief Executive Officer Ed Breen said on May 2, according to an AlphaSense transcript of a conference call with analysts.
Also read: DuPont sees weak smartphone, PC and chip demand, as consumers spend less on electronics
Begleiter said he believes the second reason for DuPont’s discount to peers is the company’s potential exposure to per- and polyfluoroalkyl substances, or PFAS, due to the company’s inclusion in litigation in federal court in South Carolina involving use of PFAS-containing firefighting foams made by 3M Co.
MMM,
with the trial scheduled to start on June 5.
But as Begleiter pointed out, Breen said on the May 2 call that there were regular talks with the plaintiffs and that he was feeling positive about a settlement.
And while DuPont’s PFAS exposure won’t go away completely after a settlement, Begleiter estimates that the company’s potential exposure “is in the tens of millions of dollars.”
Finally, Begleiter believes DuPont can outperform its multi-industry peers during a recession, because the company has already seen recessionlike conditions in nearly half of its businesses, particularly in electronics and construction.
“As a result, during the time when the U.S. might be going into a recession — [the second half of 2023] — DuPont’s largest and most profitable businesses — electronics — should be coming out of recession,” Begleiter wrote.
