Description

Thesis

Dupont’s second three way spin in the last 5 years should help to narrow the significant conglomerate discount currently embedded within its stock price. If post the H1 2026 separation the various components of Dupont trade at peer multiples, then the stock should trade around $110 per share or roughly 35% higher than the current share price providing an attractive return on an 18-24 month investment time period. 

Company Overview

Dupont is a $12.1 billion revenue specialty chemicals company. The company does business globally with its largest markets being Asia and North America. Management has spent most of the past decade trying to convince Wall Street that Dupont is really a diversified industrial conglomerate like 3M. 

The current version of Dupont was created through the merger of old Dow and old Dupont and the subsequent three way separation of the commodity chemicals businesses as Dow, the agricultural chemicals businesses as Corteva, and the specialty chemicals businesses as Dupont. Dupont subsequently merged its nutrition sciences business with International Flavors and Fragrances (IFF), sold its mobility and materials business to Celanese, sold some other noncore businesses like its Hemlock JV, compound semi solutions, Solamet and clean technologies businesses and bought a couple of other chemicals companies including Laird Performance Materials and Spectrum which increased the company’s exposure to the healthcare industry. The constant change at Dupont during CEO Ed Breen’s tenure is one of the explanations for the stock’s current significant valuation discount to other specialty chemicals companies. 

Note: Dupont has been written up several times on VIC in the past most recently by Compass868 in December 2019 after the Dow Dupont separation had been completed. https://valueinvestorsclub.com/idea/DUPONT_DE_NEMOURS_INC/1371284441 The merged DowDupont was written up three times once in 2017, once in 2018, and once in 2019. 

Ed Breen

Dupont’s CEO Ed Breen is one of the most experienced large cap corporate restructuring professionals in the world. Breen became CEO of Tyco in 2002 when it was severely distressed due to corporate malfeasance by its prior CEO and Breen successfully turned the company around before in 2007 separating Tyco into 3 companies (Tyco Electronics (now known as TE Connectivity), Covidien (ultimately acquired by Medtronic), and Tyco Remainco) through tax free spinoffs. With Breen continuing to lead Tyco remainco he subsequently did a 3 way spin off of that Tyco in 2012 spinning off ADT (subsequently acquired by private equity and brought back public), merged Tyco’s water business with Pentair and spinning off shares in the merged entity, with the remainco from those spins being a new Tyco remainco. The second Tyco remainco (a fire and security business) was ultimately acquired by Johnson Controls. 

In 2015, activist investor Trian convinced Breen to join the Dupont board and ultimately to become its CEO as it was in talks to merge with Dow Chemical. Breen led the merger between the 2 chemical giants and their subsequent 3 way spin off into Corteva, the new Dow and the new Dupont. When this spin was completed Breen stepped down as the Dupont CEO but subsequently returned in 2020 as Breen’s chosen successor had unsatisfactory performance. 

Meet the Breakup Artist Taking Apart DowDuPont - WSJ

The Separation

Last week Dupont announced plans to split itself in three through the tax free spinoff of its electronics and water business units (spinco names and management teams to be determined later.) In conjunction with the separation announcement, Dupont also announced that long time CEO Breen was transitioning to executive chairman to help facilitate the spin transactions, CFO Lori Kock was being promoted to CEO and long time Breen acolyte Antonella Franzen was being promoted from CFO of the water business unit to company CFO. Koch and Franzen will be the management team for the new Dupont remainco. 

Pre-separation Dupont’s exposure by industry was as follows:

Pre-separation Dupont reported in 2 major business units Electronics & Industrial (comprising its industrial solutions, interconnect solutions, and semiconductor technologies business lines) and Water & Protection (comprising safety solutions, shelter solutions, and water solutions business lines.) Dupont also had a corporate and other business unit which housed its advanced mobility business. 

The Electronics business is the fastest growing of these business units due to its exposure to the semiconductor industry. The water business is the least economically sensitive business unit while the new DuPont remains a diversified GDP+ growth business. 

Dupont gave fairly boiler plate rationales for the separation including unlocking shareholder value, allowing for more management focus, ability for the stocks to appeal to different shareholder bases, improve capital allocation and strategic flexibility for the different businesses, and better align management and employees to the performance of the business units they work for. 

The transaction is expected to close in 18 to 24 months, ie the end of 2025 or the first half of 2026.

Dupont’s PFAS liability will be split among the 3 new companies based upon their relative EBITDA. 

Worth noting that Dupont had a mediocre 2023 in each of these businesses due to FX and cyclical inventory destocking especially in China across most of its business lines.

The New Dupont

Remainco is a collection of specialty chemicals businesses mostly focused on the safety & protection, healthcare, and advanced mobility industries. 

50% of RemainCo sales come from the safety & protection business where Dupont has leadership positions in the safety, construction, and aerospace markets. 25% of revenues come healthcare end markets and 25% of revenues come from advanced mobility end markets – particularly electric vehicle battery, structural adhesives, and aerospace. 

Most of the safety solutions business revenue comes from the Kevlar, Nomex, and Tyvek brands. Safety solutions is arguably Dupont’s most competitive business serving the personal protection, electrical and industrial infrastructure, healthcare and consumer, aerospace and defense, and automotive markets. 

Dupont’s Tyvek business creates lightweight and durable fabrics particularly for the protective apparel and healthcare packaging end markets. Tyvek sells protective garments to industrial workers and first responders as well as “clean room” garment solutions for pharmaceutical and semiconductor employees who need to maintain clean and sterile environments. In addition, Tyvek manufactures sterile packaging for pharmaceuticals and medical devices. 

Dupont’s Nomex brand is the leader in flame resistant materials. These materials are used in garments for emergency responders and industrial workers as well as insulation for electrical infrastructure equipment. This business should be a beneficiary of the growth in electrical power demand from electrical vehicles and artificial intelligence. 

Dupont’s Kevlar brand is a lightweight and high strength material used primarily for personal protection for military and law enforcement officers. 

The other part of Remainco’s Safety & Protection business is what the current Dupont has referred to as “Shelter Solutions.” This business is primarily in North America and mostly consists of products used in the building and construction industry for energy efficiency, insulation, weather protection, and aesthetics. 

Given this business is levered to residential and commercial construction activity, the spike in interest rates over the last couple of years is likely to be a headwind for demand over the next couple of years. 

New Dupont’s healthcare business primarily relates to the Spectrum Group acquisition Dupont did in 2023. Dupont paid $1.75 billion (15.6x EBITDA) for this business. Spectrum Group sells polymer and silicon extruded medical tubing, catheter technologies, medical balloons, injection molding for implantables, and flexible packaging and films used in the healthcare industry. 

Dupont’s next gen auto business which previously had been lumped into corporate and other is also being included in Remainco. 

There is no real peer for Remainco but it’s likely to be considered like other diversified industrial companies. Diversified industrial companies like Eaton, Parker-Hannifin, Dover, Illinois Tool Works, and Honeywell trade around 17x EBITDA.

Electronics Company

The Electronics business has sales of roughly $4 billion and EBITDA margins of ~29%. The business is a global leader for electronic materials especially for the semiconductor industry. The Electronics company is primarily a consumables driven business (~90% of revenues come from consumables.) The electronics company will also include Dupont’s Interconnect Solutions business which includes thermal management, advanced circuit, and films & laminates. End markets for the Interconnect Solutions business includes advanced printed circuit boards, consumer electronics, and autonomous vehicles. 

60% of electronics spinco revenues come from the semiconductor industry. This business is driven by wafer starts and is not really exposed to changes in semi pricing trends or semi manufacturing companies capex and equipment cycles. This business had a cyclical downturn in 2023 due to destocking in China. 

The electronics business is most levered to consumer electronics and smartphones. Note this chart from early May 2024 includes the industrial solutions business in electronics & industrial which is staying at Remainco. 

The Semiconductor Technologies subunit is roughly ½ of Electronics Spinco’s revenues. This business originally came from Rohm & Haas (which was acquired by Dow Chemical prior to the Dow-Dupont merger.) The semiconductor technologies business is spread across chemical mechanical planarization, lithography materials and services, precisions parts, and display materials. 

The semiconductor technologies business is relatively capital light which allows Dupont to quickly expand capacity to meet rising industry demand.  

The other part of the Electronics company is Interconnect Solutions. This subunit is levered to demand for printed circuit boards, consumer electronics, smartphones, and general memory markets. This business was formed through the merger of old Dupont’s circuit and packaging materials portfolio and old Dow’s metalization chemistries for printed circuit boards and electronic industrial finishings. The key end markets for Interconnect Solutions are consumer electronics, smartphones, telecom, autos, industrial, medical, and defense markets. 

Interconnect Solutions sells metalization, dielectric, and thermal interface materials for the post wafer process cycle. These are solutions used to form the connection of the integrated circuit chip to the package substrate or connect the chip directly to the printed circuit board. Interconnect Solutions also sells films and laminates that go into applications within the printed circuit board, electronic, and industrial finishing end markets. 

Comparable companies to Electronics Spinco include Entegris (ENTG) and Element Solutions (ESI.) ENTG currently trades at 23.7x 2024 EBITDA and ESI currently trades at 14.4x EBITDA. 

Water Company

WaterCo is a global leader in water filtration and purification solutions providing critical components and systems that generate clean and fit for purpose water across a variety of end markets. 

~60% of revenues come from industrial markets particularly textiles, heavy industry, power, and microelectronics. Life sciences (dairy, pharmaceuticals, sweeteners) comprise ~20% of revenues and consumer and municipal wastewater and drinking water comprise roughly 10% each of revenues. In terms of products, roughly 40% of revenues come from reverse osmosis products used in desalination and water purification, roughly 40% of revenues come from ion exchange resins used for ionic level water purification and roughly 20% of revenues come from ultra-filtration which uses fibers or sheet membranes to remove viruses, bacteria and other particles from drinking and waste water. 

The water business is most concentrated in Asia with Europe and North America combined slightly smaller than Asia. 

Before a slowdown in 2023, the water business was growing at a 7% organic cagr. 

The water business focuses primarily on water filtration including reverse osmosis as well as ionic level separation and purification of water and process streams. 

There really aren’t great public comparables for the water business but companies perceived to be “water” companies like Pentair (PNR), Xylem (XYL), and Veralto (VLTO) are likely to be considered as WaterCo’s peer set. PNR currently trades at 15.5x EBITDA, XYL currently trades at 21.0x EBITDA, and VLTO currently trades at 20.0x EBITDA. For what it's worth, on the separation call, Breen said he believes the water business should trade at the higher end of this range because it has a similar margin profile to those companies and has the most extensive live of filtration technologies possible including those used for lithium extraction and green hydrogen. 

On the call announcing the 3 way spin, Breen also noted that the water spin could happen before the Electronics spin since it is a smaller and easier to separate business. 

Balance Sheet

Dupont hasn’t indicated how its $7.8 billion in existing gross debt will be allocated between the 3 companies. The company had $1.9 billion in cash at 3/31. The company also has $300 million of net pension underfunding. 

While Dupont has not indicated how its debt will be allocated among the 3 companies, Dupont has indicated that it wants Remainco to have a BBB credit rating. According to Barclays this would imply a need to repay somewhere between $4 billion and $4.7 billion in existing debt presumably with the proceeds of new debt issued at the Electronics Co and Water Co companies. 

PFAS

The biggest overhang on Dupont’s stock price over the past 5 years has been uncertainty over the extent of liability the company will ultimately face related to its exposure to PFAS. In 2021 Dupont entered into a cost sharing arrangement with Chemours (titanium dioxide business spun out of Dupont in 2015) and Corteva. Under that agreement, the 3 companies agreed that the first $4 billion of “qualified spending” would be split $2 billion to Chemours, $1.4 billion to DuPont and $600 million to Corteva. Dupont has already spent roughly $175 million against its portion of this cap leaving it with roughly $1.225 billion of remaining exposure. 

DD’s PFAS liability will be pro-rated across the 3 companies post separation based upon their relative EBITDA at time of spin. 

On the separation announcement call last week Breen was fairly confident that the PFAS liability is contained. 

On the Q1 earnings call, Breen indicated that he expected most of the State AG lawsuits to be settled in 2025 and noted that Dupont’s exposure is fairly limited. Note the litigation with the municipal water districts was settled late last year. 

Of course, one possible risk is that PFAS liabilities ultimately exceed Chemours ability to pay its share of the three party agreement and that agreement has to be restructured. Chemours currently has a $4 billion market cap. 

Putting it all together

On a Sum of the Parts Basis using 2023 estimated EBITDA numbers for the different companies as well as our estimate for the remaining PFAS liability we back into a fair value post separation of around $108 per share.  

All three companies have relatively high EBITDA margins and exposure to secular growth industries. As the spin process plays out (naming of the spinco management teams, preparation of carve out financials, filing of the Form 10s, analyst days for the spincos, et cetera) we would expect the Dupont to trade closer to this sum of the parts valuation.  

Catalyst

Naming of the Electronics Company and Water Company and naming of their management teams and boards. Filing of the Form 10s for the 2 spincos. Conference presentations with the management teams of the 2 spincos. Analyst Days for the 3 companies. 

Completion of the spinoffs and/or a possible sale of one of the spincos pre-separation.

Also, cyclical recovery leading to restocking in the product lines that were impacted by destocking mostly due to the weak Chinese economy in 2023.