DuPont: New Management Reaffirms 2020 EPS, Trims Sales Guidance, Attractive 8% Options Yields (NYSE:DD)
DuPont de Nemours (DD) is one of the oldest companies in the US, founded in 1802 as a gunpowder mill. Over the past two years, the company has gone through a series of divestitures and mergers that has been called the most complicated in history.
DuPont announced in February that, “CEO Marc Doyle and CFO Jeanmarie Desmond will leave the company after less than a year in their most recent positions with the board saying it made the changes “to accelerate operational performance improvement and to more directly tap Ed Breen’s significant management experience.
“Breen joined the DuPont board in February 2015 from Tyco International, where he was chairman and CEO, and was named DuPont’s CEO in November 2015. Breen spearheaded the Dow-DuPont merger, became Executive Chairman of its specialty products unit after the company split into three different units.” (DuPont site)
DuPont has four major segments, in addition to a group of non-core assets.
Nutrition/BioSciences had 28% of 2019 net sales, followed by Safety & Construction, 24%, Transportation & Industrial, at 23%, Electronics & Imaging 17%, and Non-Core forming the balance.
Its biggest market is Asia/Pacific, at 38% of 2019 net sales, followed by the US, 33%, EMEA, 23%, and Latin America, 6%.
All of the product and geographic segments had sales declines in 2019, which most likely led to the shuffling of management by the board in February 2020.
Safety & Construction was the only segment which had positive EBITDA growth in 2019, rising 10.6%, while Transportation/Industrial fell by -13.5%, and non-core fell by -27%.
Revenue and operating EBITDA fell by ~ -4.4% to -4.5%, while operating cash flow had a much deeper decline of -70%. Plain vanilla Net Income and diluted EPS both slipped over -86%, while proforma adjusted diluted EPS held up better, with a -6.6% decline:
The Q4 ’19 adjusted EPS bridge illustrates the various supports and pressures on DuPont’s latest earnings, which had -$.25 in segment results, -$.22 difference in taxes, a collective -$.01 in below the line items. Segment results showed four negative issues from volume/production, Transport & Industrial pricing pressures, planned maintenance, and equity affiliate income, all tempered somewhat by pricing gains in other segments, and cost synergies:
In mid March, management reaffirmed Q1 and full-year earnings guidance but trimmed revenue expectations, as part of a presentation for the JPMorgan Industrials Conference. For Q1, they reaffirmed EPS guidance of $0.70-$0.74, in line with $0.71 analyst consensus estimate, on revenues of $5B-$5.1B from $5.1B-$5.2B, slightly below the $5.11B consensus. For full-year 2020, the company reaffirmed adjusted EPS of $3.70-$3.90 vs. $3.70 consensus but modified revenue guidance to $21.3B-$21.8B from $21.5B-$22B, in line with $21.52B consensus.
However, there’s a disclaimer below this guidance graphic: “The Company is not able to quantify the impact of COVID-19 beyond the first quarter 2020.” This makes sense, of course, since no one knows how long this plague will last and how deep its effects will be on industry.
Updating the effects of the coronavirus outbreak, DuPont said that 12 of its 13 sites in China were operating, as of 3/11/20, with one site in Wuhan still closed, nine sites operating at full capacity and others greater than 70%. The company’s Italy site has been shut down, but its Japan and Korea sites are operating at 100%.
A positive development is that DuPont is in a position to aid the fight against the virus due to its manufacturing capabilities:
“DuPont is stepping up efforts to help protect the frontline fighters. The company’s manufacturing facilities are working round the clock to boost capacity of protective garments amid soaring demand. DuPont’s Spruance manufacturing plant is boosting the production of Tyvek, a material (made from high-density polyethylene) which is used to make protective garments that shield frontline medical personnel from contracting the virus. Notably, the company is ramping up the production of Tyvek hazmat suits, a product critical to protecting U.S. doctors and nurses.”
They previously issued, in late January ’20, before the outbreak hit the US, this cash flow guidance for 2020, which will probably be adjusted at some point, when they have more operating data to work with. DuPont should report Q1 ’20 earnings ~the end of April.
A big potential tailwind is the merger of its Nutrition & Biosciences (N&B) business with International Flavours & Fragrances (IFF), which will create a $45B entity which sells high-value ingredients and solutions for global Food & Beverage, Home & Personal Care and Health & Wellness markets, with estimated 2019 pro forma revenue of more than $11 billion and EBITDA of $2.6 billion, excluding synergies. The complementary portfolios will give the company leadership positions across key Taste, Texture, Scent, Nutrition, Enzymes, Cultures, Soy Proteins and Probiotics categories.
“IFF expects to realize cost synergies of approximately $300 million on a run-rate basis by the end of the third year post closing. These cost synergies will be driven by procurement excellence, streamlining overhead and manufacturing efficiencies. In addition, the combined company’s target is to deliver more than $400 million in run-rate revenue synergies, which would result in more than $175 million of EBITDA, driven by cross-selling opportunities and leveraging the expanded capabilities across a broader customer base.
IFF is committed to maintaining an investment grade rating and plans to delever from approximately 4.0x at transaction close to below 3.0x by year two following closing.
Upon completion, DuPont shareholders will own 55.4% of the combined company and IFF’s shareholders will own 44.6%. In addition, at the time of completion, DuPont will receive a one-time $7.3 billion cash payment, subject to adjustment. The transaction is expected to be tax free to DuPont and its shareholders for U.S. federal income tax purposes. The parties target closing the deal by the end of the first quarter of 2021.” (Source: DuPont site)
DuPont got a break this week when a Delaware judge granted its request to dismiss a lawsuit alleging that it downplayed the cost of environmental liabilities imposed on spinoff company Chemours (CC). Chemours says it will appeal the decision to the Delaware Supreme Court.
A Keybanc analyst sees this as a positive for DuPont and initiated coverage with an Overweight rating, and a price target of $44.00. However, price targets in our current, rapidly-shifting environment can be very tough to go by.
Earlier in March, DuPont’s management issued this synopsis of the company’s litigation exposure. They noted that, in the AFFF and NRD cases, DuPont either never manufactured, sold, or even had a presence in the states where the lawsuits are filed:
Looking backward at 2019, the comparative bright spot is DuPont’s EBITDA margin of 24.08%, significantly higher than the 15.79% sector median.
Like many beaten-down stocks, some of DuPont’s valuations look cheap when compared to broad-based sector medians, particularly on a trailing adjusted P/E and Price/Book basis.
At $32.60, DuPont yields 3.68%, with a dividend payout ratio of 31.58%. It should go next on ~5/1/20.
Like many of the stocks in our recent articles, higher volatility has propelled DuPont’s options-selling yields to heights not seen since the 2008 market crash. With all of the uncertainty, you may want to consider hedging your bet on some target stocks via selling options on a short-term or near-term basis.
Since DuPont goes ex-dividend next in early May, we chose the May options expiration. The $35.00 call strike bid pays $2.34, over 7X DD’s quarterly $.30 dividend.
If your shares do get assigned, the total profit nearly doubles, to $4.74, for a 14.54% yield.
The third profitable scenario would be if your shares get assigned after the early May ex-dividend date, in which case your profit would be $5.04, a 15.46% profit in ~6 weeks, or 121.54% annualized.
NOTE: We only use annualized yields in our options tables so that viewers can compare trades of varying lengths of time.
DuPont’s May $30.00 put strike pays $2.26, offering you a $27.74 breakeven, which is a bit below DuPont’s $28.33 52-week low.
All tables by DoubleDividendStocks.com, except where noted otherwise.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DD over 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.
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