The Stock To Own In 2017? Citi Upgrades Dow, DuPont Ahead Of Proposed Merger

Citi upgraded E I Du Pont De Nemours And Co DD and Dow Chemical Co DOW ahead of the merger between the companies. The firm commended the companies as "execution and self-help stories" as they diligently went about their individual cost-cutting programs.

Citi upgraded shares of both DuPont and Dow to Buy from Neutral. The price target on shares of DuPont was lifted to $76 from $72, and that for Dow to $59 from $55.

Unlocking Shareholder Value

Analysts see incremental cost cuts upon the merger. The analysts noted that Dow had gone on a 15-quarter EBITDA growth streak and DuPont is on track to achieve $730 million of realized cost reductions or $1 billion on a run-rate basis by the end of the year. The analysts believe a combination and splitting the combined company into three could result in significant shareholder value.

The analyst pointed out that Dow-DuPont CEO Ed Breen is looking to split the MergeCo into three companies before a 18-24 month timeframe.

Citi Sees Overshooting Synergy Target

Even as the companies seek to achieve $3 billion in synergies apart from the cost cuts, Citi believes the realized numbers in terms of synergy could be as high as $4 billion. From the split-up lean and agile companies, the firm expects an incremental $1 billion synergy over the companies' target, adding $0.30 per share to proforma earnings of Dow DuPont.

Citi sees the company benefiting from the investments Dow has made in Gulf Coast and the acquisition of Corning, as Dow Corning's silicone chemistry fits well with its existing chains and revenue synergies.

Estimate Changes

Citi raised its 2017 earnings per share estimate for DuPont to $3.80 from $3.60 and that for 2018 to $4.12 from $3.93. The firm raised its 2017 earnings per share estimate to $4.06 from $3.96, but lowered its 2018 estimates to $3.93 from $3.99.

Citi said if the two companies successfully merge, a combined Dow-DuPont would be the stock to own in 2017.