I think the most important factor in getting out of the recession actually is just the regenerative capacity of American capitalism. – Warren Buffett
There is great news for DuPont de Nemours (NYSE:DD) shareholders – Wells Fargo has recently confirmed its Overweight rating and raised its price target to $65. RBC Capital also has upgraded the stock from Sector Performer to Outperformer and raised its target price to $66. This is bullish news in a market that is trending higher week after week.
Though DD faces many challenges in 2020-21 because of the COVID-19 disruption, its management team has moved swiftly to ensure that the company can easily handle whatever comes its way. Based on the following two factors – (A) company’s swift and efficient handling of the virus disruption and minimizing its impact and (B) company’s profitability – I am bullish on the stock. Here are my reasons.
DD’s COVID-19 Plan
DD’s management team moved swiftly to fortify the company’s cash and access to credit in the event of a prolonged downturn. It has achieved these goals by slashing $500 million from its budgeted capital expenditure, cutting operating expenditure by $180 million, securing a $1 billion 364-day revolving credit facility, and obtaining a $2 billion delayed-draw term loan to pay its debt maturing in November 2020. These moves will help the company easily navigate past the disruption.
DD plans to focus on strong segments such as electronics & imaging, nutrition & biosciences, and safety & construction, while reducing activity in impacted segments like transportation & industrials and non-core manufacturing. DD’s automotive-related business contributes 15% to its sales, and it has decided to go slow with this segment because of falling demand. It is instead focusing on its hot sellers like semiconductors, nutrition, biosciences, and protective gear. The company has committed to pay dividends and has budgeted $900 million towards payouts.
As of July 10, 2020, it appears that DD has stocked up on adequate resources to sail through the disruption and is all set to take advantage of the market when things return to normal.
Source: Seeking Alpha
DD is a sector outperformer. Its gross profit margin at 36.38% is a whopping 10% higher than the sector median of 26.67%. The Levered Cash Flow Margin of 62.79% on a TTM basis implies that the company is left with a solid amount of cash after meetings its obligations. The company has reported a negative net income margin of 3% and a negative return on total equity of 0.94% because of goodwill impairment and depreciation.
Q1 2020 Profitability
Though DD reported a $616 million net loss from continuing operations in Q1, 2020, its operating cash flows were positive at $718 million because of non-cash charges like depreciation and impairments to goodwill.
Out of its 170 manufacturing sites, just two were shut as of May 5, 2020. The latest updates are not available, and I’m assuming that the situation is more or less the same today because many states have reopened.
The shutdown began in late March 2020, and therefore, the company may pass through a rough Q2 2020. The virus resurgence is not likely to impact DD much from Q3 2020 onwards because it has cut down on unprofitable segments and is focusing on divisions that are doing well despite COVID-19 – for example, semiconductors, nutrition, biosciences, and protective gear.
DD is a quality company spearheaded by an aggressive and efficient management team. Its price has the potential to appreciate in the near term because of the upgrades received from Wells Fargo and RBC Capital. Plus, the company is focusing on making products for which demand is spiking because of the COVID-19 disruption.
The company is prepared for a prolonged disruption, is focused on very profitable products that are in demand, and is a sector outperformer. I am bullish on the stock because, sooner or later, this virus will be contained. Till that day, DD has access to enough cash to meet any contingency. Even if the virus resurgence pushes us deeper into the crisis, companies like DD are insured because they make products that are in demand even during such difficult times.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.