Hold On DuPont Investors: Macro Risks And Valuation Cap Force Jefferies To Downgrade Stock

• E I Du Pont De Nemours And Co DD shares have climbed 41 percent since September 15, while shares of Dow Chemical Co DOW are up 20 percent over the same period.
• Jefferies’ Laurence Alexander downgraded the rating on DuPont from Buy to Hold, while maintaining a price target of $75.
• Integration and end-market risks are likely to restrict the value of DuPont’s shares through late 2016, although a better entry point is likely in mid-2016, Alexander said.

The proposed merger between DuPont and Dow Chemical [Rated: Hold] is expected to result in the creation of a strong player in agrichemicals, seeds and agronomy, besides forming a more robust petrochemical franchise, analyst Laurence Alexander mentioned.

The deal will also result in the creation of an innovator in industrial biotech and nutrition. Alexander added, “We believe greater granularity will be needed to validate the medium-term prospects for the non-PV electronics materials businesses, as well as the fit between the more cyclical electronics and aramids businesses and Nutrition.”

The analyst believes that following the deal with Dow Chemical, DuPont’s shares will be driven less by Agnewsflow and more by details relating to cost synergies, levers to deliver these synergies and risks to Dow Chemical’s petrochemical chain margins.

DuPont will implement a $700 million cost cutting program including staff cuts in 2016 ahead of its merger-related synergy initiatives. The company’s post-merger performance will be negatively impacted by a higher tax rate and forex rates, Alexander commented.

The EPS estimates for 2016 and 2017 have been reduced from $3.15 to $3.05 and from $3.70 to $3.65, respectively.