Weekly Chemical Notes: Peltz Pushes DuPont For Split, Dow Receives Regulatory Approvals

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The past week saw notable developments in the chemicals space. Activist investor Nelson Peltz’s Trian Fund Management LP, which holds a $1.6 billion stake in DuPont (NYSE:DD), accused the company of destroying shareholder value by maintaining an inefficient conglomerate structure and urged it to break itself up into more functionally oriented units. The hedge fund claimed that separating DuPont’s agriculture, nutrition and health and industrial biosciences divisions from performance materials, safety and protection and electronics and communications divisions would eliminate $2 to $4 billion in annual costs. Apart from that, DuPont also announced plans to increase its packaging and industrial materials production capacity by investing more than a $100 million in expanding the production of fast-growing ethylene copolymer products. [1] On the other hand, The Dow Chemical Company (NYSE:DOW) received a final approval from the U.S. Department of Agriculture (USDA) to commercialize its ‘Enlist’ labeled corn and soybean seeds in the U.S. [2] Below, we provide an overview of each of these events and their potential impact on the respective companies.

DuPont’s Ethylene Copolymer Production Capacity Expansion

The global food packaging demand has been growing steadily over the past few years because of the rising sales of convenience foods like ready-made and easy meals, and snacks, which are gaining popularity among time-strapped consumers. [3] Moreover, the rising middle class in China, India, Brazil and other emerging markets is also driving the demand for food packaging materials higher. According to Ken Research, the global food packaging market grew at 2.5% CAGR between 2008 and 2013 and is expected to grow at 3.1% CAGR between 2013 and 2018. [4]

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DuPont’s Performance Materials division deals in several food packaging materials. The division that contributes almost 18% to DuPont’s total sales revenue derives 11% of its sales from the food packaging market. Some of the key food packaging materials sold by DuPont include Surlyn, which is used in seafood and meat packaging among other applications, and Nucrel, which is used in liquid packaging pouches. DuPont also sells Elvalo and Elvax ethylene copolymers that are also used in food packaging applications. The company is planning to increase the production of all these products due to their continuing strong demand. We currently expect DuPont’s ethylene copolymer sales revenue, which stood at $1.62 billion last year, to grow to around $2.33 billion by the end of our forecast period, implying a CAGR of more than 4.5%.

  • We currently have a $72/share price estimate for DuPont, which is almost in line with its current market price. The company’s stock price jumped by almost 10% last week, as Trian Fund’s push raised hopes of further simplification of the company’s operating structure. [5]
  • We currently estimate DuPont’s 2014 diluted EPS to be at $4.02, which is in line with the consensus estimate reported by Reuters.

See Our Complete Analysis For DuPont

USDA’s Approval Of Dow’s Enlist Corn and Soybean

The Dow Chemical Company’s ‘Enlist’ labeled corn and soybean seeds, which are a part of the new weed control system developed by it, received final approval from the U.S. Department of Agriculture (USDA) last week. These seeds are genetically modified to tolerate the application of more effective herbicides, as weeds in the U.S. are growing increasingly resistant to the glyphosate-based herbicides most commonly used today. The USDA’s approval of the Enlist corn and soybean seed traits is a big step towards the commercialization of this technology. It is now contingent on the U.S. Environmental Protection Agency’s (EPA) approval of the Enlist Duo herbicide. [2]

Dow’s Enlist Weed Control system includes seeds that are genetically modified to tolerate the new herbicide from Dow, Enlist Duo. This herbicide contains 2,4-D that adds another mode of action to the glyphosate-based herbicides. There are a few concerns associated with its potential harmful impact on specialty crops that are not genetically modified to tolerate the inadvertent application of 2,4-D chemical used in the Enlist Duo herbicide, due to its volatile nature and ‘drift’. However, it looks like Dow will be able to commercialize the Enlist weed control system in the U.S. next year since the EPA has already said that it is prepared to grant an approval to Dow’s Enlist Duo herbicide. We believe that the commercialization of the Enlist weed control system could boost Dow’s market share in the robust agricultural products market significantly. [6]

  • We currently have a $53/share price estimate for Dow Chemical, which is almost in line with its current market price. The company’s stock price increased by 1.6% last week.
  • We currently estimate Dow’s 2014 diluted EPS to be at $2.80, compared to the consensus estimate of $2.95 reported by Reuters.

See Our Complete Analysis For Dow

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Notes:
  1. DuPont Announces Plans to Increase Packaging & Industrial Polymers Capacity, dupont.com []
  2. USDA Allows Commercialization Of Dow AgroSciences’ Enlist Corn, Soybean Traits, dowagro.com [] []
  3. Convenience, It’s What’s For Dinner Tonight, nielsen.com []
  4. Global Food and Beverages Consumer Packaging Market Outlook to 2018, kenresearch.com []
  5. Nelson Peltz Calls For DuPont Break-Up, ft.com []
  6. Dow Chemical’s Enlist Weedkiller Preliminarily Approved, bloomberg.com []