DuPont (DD – Free DuPont Stock Report) and Dow Chemical (DOW), two giants in the basic chemicals industry, are combining in a merger-of-equals deal. Subject to regulatory approval, DuPont shareholders will receive 1.22 shares of the new company, to be named DowDuPont, for each of their shares, while Dow holders will receive stock on a one-for-one basis. DowDuPont will eventually separate into three publicly traded companies with a focus on agriculture, material science, and specialty products. The material science company will be headquartered in Midland, Michigan (Dow’s home state), and the other two in Wilmington, Delaware (DuPont’s home state). The corporate separation is expected to occur 18 to 24 months after completion of the initial deal.
The term “merger of equals” is sometimes misused in deals in which one company is clearly bigger, but it appears to be apt in this case. The market capitalizations of DuPont and Dow are similar, and the board of directors will be composed of eight directors from DuPont and eight from Dow. One difference is that DuPont is one of the 30 stocks in the Dow Jones Industrial Average, while Dow is not. Presumably, DowDuPont will remain a Dow-30 component, but it remains to be seen what will happen after the corporate separation.
The transaction is driven by opportunities to effect synergies. The combined company is targeting a total of $3 billion of cost reductions and $1 billion of “growth” synergies. This will take some time, and will cost an estimated $3.5 billion-$4.1 billion to achieve. Management believes it can complete the process in under 24 months.
Readers of the full-page report on DuPont in The Value Line Investment Survey will notice in the Ranks box that the stock’s Timeliness and Technicalranks are suspended. This is due to the effect of the merger on DuPont’s share price, which means the stock is not trading solely on company fundamentals. A stock might also have no Timeliness or Technical rank if its trading history is brief, or if its price is so low that a small change in price on an absolute basis is relatively large on a percentage basis.
The Ranks box shows that DuPont stock boasts our top grade for Safety. This is based on a combination of favorable ratings for the company’s Financial Strength, A++ (the highest possible mark) and Price Stability, 75 out of 100, as viewed in the Ratings box. Although DuPont has some leverage—long-term debt made up 45% of total capitalization as of September 30, 2016, as displayed in the Capital Structure box, this box also indicates that interest coverage is healthy, at 8.6 times. On that date, the company had $5.5 billion in cash, shown in the Current Position box.
DuPont’s performance over the past several years has not always been smooth. The Statistical Array indicates that earnings and sales have not risen consistently. In fact, an investor launched a proxy fight against DuPont, which management won in May of 2015. Another noteworthy event happened in July that year when the company completed a spinoff of its performance chemicals business, The Chemours Company (CC), as noted in the Footnotes. The spinoff explains the reduction in the common dividend, as noted in the Quarterly Dividends box. As for DuPont’s current prospects (on a stand-alone basis), our estimates in the Array suggest that the company will post decent increases in sales and earnings in 2017.
Although DuPont stock is ranked 1 (Highest) for Safety, as mentioned earlier, this does not necessarily mean that it is a good choice for conservative investors. The Top Label shows a relative price-earnings ratio above 1, meaning that the equity is trading at a market premium. The Top Label also displays a dividend yield that is average compared to the Value Line median. Although this will be relevant only if the merger falls through, the Projections box indicates that the stock’s recent price is already within our 2019-2021 Target Price Range. Accordingly, long-term total return potential is unappealing. We conclude with a quote from the Commentary section of the report written by Michael Napoli: “patient subscribers can probably find more-attractive opportunities elsewhere at this juncture.”