As we know, GuruFocus keeps us posted on what the investing giants, the gurus, are up to in managing their portfolios and funds. One of the tools it provides for tracking the gurus is the S&P 500 screener, which aggregates all the buys, sells and holdings in one large table.
On May 12, the company at the top of the buy list on the screener was DuPont de Nemours Inc. (DD, Financial), a company selling at a significant discount, as shown in this 10-year chart:
Its price began falling in January 2018, just four months after it had merged with Dow Chemical (DOW, Financial), one of its competitors in the chemicals business. But the $130 billion company created by the merger, DowDupont, was just a stepping stone to an entirely new structure.
It was the beginning of a tangled web, at least in the eyes of many outsiders. Dow and Dupont each had divisions or subsidiaries competing in the same niches, so they created one new company and revamped the two entities to put together the new package:
- Dow would become a separate company again and focus on commodity chemicals (or material sciences).
- Dupont also would become a company on its own and focus on specialty chemicals.
- Agricultural product producers from both companies would be combined under a new spinoff, Corteva Inc. (CTVA, Financial).
And that wasn’t the end of the restructuring. In December 2019, Dupont, which had just split itself out the DowDupont conglomerate, announced that its nutrition and biosciences division would merge with International Flavors & Fragrances Inc. (IFF, Financial). As announced in a news release, Dupont shareholders would own 55.4% of the combined company, while International Flavors shareholders would own 44.6%. In addition, Dupont would receive a $7.3 billion payment on completion of the deal (expected in 2021).
Many conglomerates have generated better performance by breaking up because management teams in former divisions or subsidiaries become more entrepreneurial. It also helps expose weak performers, companies or divisions that needed cross-subsidization from successful performers. After a conglomerate breakup, winners can keep their earnings and grow their companies more quickly, while the underperformers can be sold or closed.
Is that what’s attracting the interest of the gurus? It won’t be the conventional financials, which look dismal. Of course, in many cases, the fundamentals reflect a company in churn mode since it did the big merger with Dow less than three years ago, then restructured the organization and de-merged.
With that caveat, here are Dupont’s summaries for financial strength and profitability:
Note that the company has an increasing debt load, its Altman Z-Score is weak and that its return on invested capital is less than its weighted average cost of capital. On the profitability chart, note all the negatives, including the net margin, ROE (return on equity) and its Ebitda (earnings before interest, taxes, depreciation and amortization) growth rate. Again, I would caution these fundamentals reflect a company undergoing a substantial transformation.
GuruFocus does not provide a discounted cash flow estimate because the predictability of its earnings is too low. It gets a one-star (out of five) rating, but that will likely improve (along with the underlying earnings per share) when the company completes its deal with International Flavors & Fragrances (which is another year away).
The gurus’ bullish sentiment is shared by the 10 analysts followed by Nasdaq. The consensus among them, over the past three months, is a strong buy rating. The consensus 12-month price target is $52.36, which is $6.68 or 14.6% more than the current price of $45.68. The highest estimate is $79 and the lowest is $35.
As I understand it, investors who owned shares of DowDupont will now have shares in four different companies, Dow, Dupont, Corteva and International Flavors & Fragrances. That will also entitle them to dividends, where and when they are available.
But are there many of those shareholders, who held DowDupont shares, still around? As the price chart above showed, the share price has taken a severe beating.
And that gets us back to the gurus, most of whom have a medium-to-long-term perspective and can see robust returns for those who wait—especially if they can get into a position at a deeply discounted price. Given that Dupont is now a company that has survived for 217 years, they may have a point.
Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.
Read more here:
- Apple, Amazon and Share Buybacks
- Paul Tudor Jones Hedges With Bitcoin
- Service Corp International: Death and Economics
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
