Morgan Stanley: Underperformance In DowDuPont Provides An Attractive Entry Point

DowDuPont Inc DWDP, a chemical conglomerate formed following the merger of Dow Chemical and Dupont, is soon to be split into three publicly-traded companies, focusing on agriculture, materials science and specialty products.

The Analyst

Morgan Stanley analyst Vincent Andrews remains Overweight on DowDuPont, with an $80 base-case price target, suggesting 20 percent upside from current levels.

The Thesis

Recent underperformance in DowDuPont has left shares trading at a 10 percent discount to peers, and the gap is likely to close in between now and the spin-offs, due to materialize in the first-half of 2019, Andrews said in a note. The underperformance, he said, is due to investor perception that there are no catalysts in 2018.

Although the market articulated limited need to own shares in the first half of 2018, the analyst expects sentiment to turn in the second half of the year, once Form 10s are filed, finalized credit ratings clarify ample BS capacity, and the market begins to value DowDuPont as three separate companies.

Andrews sees further upside from balance sheet use, as the company has a net leverage of 1.1 times the estimated EBITDA for 2018, which he feels can be increased to at least 2.5 times, as all the three companies have investment grade ratings.

The company could also benefit from strategic activity, especially at Specialty Co., the analyst said.

Price Action

DowDuPont shares are up merely 3 percent over the past year. The stock ticked up about 2.5 percent Wednesday to $68.04.

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Posted In: Morgan StanleyVincent AndrewsAnalyst ColorReiterationAnalyst Ratings