Newly Merged DowDuPont Gets A Bullish Call From Goldman

DowDuPont Inc DWDP was formed due to the recent merger between Dow Chemical Co DOW and E I Du Pont De Nemours And Co DD. The merger was completed Aug. 31, 2017.

About three months into DowDuPont's existence as a merged entity, Goldman issued a bullish call on the combined company.

The Analyst

Goldman Sachs analyst Robert Koort reinstated coverage on the shares of DowDuPont with a Buy and 12-month price target of $91, suggesting 28-percent upside from current levels.

The Thesis

DowDupont "offers one of the strongest self-help stories in the chemicals segment by transforming from a massive conglomerate to a group of more narrowly focused individual companies," Koort said in a Sunday note. (See Koort's track record here.) 

The company is set to spin off into at least three different companies — namely AgCo, MaterialCo and SpecialtyCo — in an 18-24 month timeframe, the analyst said. 

The transformation from a large conglomerate to a group of more narrowly focused and streamlined businesses creates an appealing investment opportunity due to the following reasons, Koort said: 

• The cost-cutting potential offered by the high cost structure of the company.
• Increased investor interest for various businesses, with expectations that robust segmental data provided by the company will lift valuations.
• The more narrowly focused businesses will have more strategic optionality. 

Although agriculture and commodities have less attractive industry expectations, Goldman expects 17-percent EBITDA growth, thanks to cost and growth synergies and solid specialties trends.

"The multiple expansion should evolve as investors delve deeper into the fundamentals of each DWDP spin-off entity (AgCo, MaterialCo and SpecialtyCo) and as options for strategic optionality arise," Koort said. 

On valuation, Goldman said DowDupont has substantially underperformed the Materials Select Sector SPDR XLB over the last year, suggesting upside opportunity that could be realized as it begins separating into three portfolio businesses.

The Price Action

Shares of DowDupont are up over 26 percent year-to-date. Since the Aug. 31 merger, the stock is up a more modest 8 percent.

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