35% Downside For DuPont Stock?


Despite a 30% decline in DuPont’s (NYSE:DD) stock since the beginning of the year, at the current price of around $45, we believe DuPont has a significant downside. Why is that? The key is DuPont’s stock is -40% lower than it was at the end of 2018, led by a decline in earnings, and P/E multiple based on pro forma numbers. Our dashboard, ‘DuPont Downside: How Low Can DuPont Stock Go?‘ provides the key numbers behind our thinking, and we explain more below.

The company’s revenue was down 4.8% between 2017 and 2019, while the EPS (Non-GAAP) declined 7.2% from $4.09 in 2018 to $3.80 over the same period, based on pro forma numbers. The company’s revenues and margins could see a decline in the near term. In fact, DuPont recently reported its Q1 results, with a 4% decline in the top line and a 9% drop in the bottom line on an adjusted basis. We believe that the trend is only going to worsen in Q2, as the situation on the ground has drastically changed since the end of March, with the outbreak of COVID-19 outside of China to the rest of the world, primarily the U.S. becoming the epicenter of the crisis. We believe DuPont, in line with other chemical companies, will likely face a challenging 2020.

So what’s the likely trigger and timing to this downside?

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The current coronavirus crisis will likely have some impact on DuPont’s business, due to an overall decline in the automotive, aerospace, and oil & gas industries. DuPont’s products have a vast array of applications and are used by a wide range of industries which include pharmaceuticals, food, construction, transportation, oil & gas, and automotive among others. The COVID-19 pandemic will have a significant impact on economic growth. In fact, the global economy is feared to go into recession, which will have a widespread effect on various industries, such as automotive and aerospace to name a few. This will directly impact DuPont’s sales.

While DuPont’s sales are expected to bounce back in line with the broader recovery in the economy, there are uncertainties around its timeline. This can be attributed to the unavailability of a cure or vaccine for the treatment of COVID-19. While there are several pharmaceutical companies working to develop vaccines for COVID-19, it could take 10-12 months for them to be commercially available. As such, we consider a scenario for 2020, with investors revising their expectations for the full-year revenue to be closer to $19.4 billion – about 8% lower than its 2017 pro forma revenue of $21.0 billion, and 10% lower than the 2019 revenue of $21.5 billion. Also, if investors take a more pessimistic view of earnings growth over 2021 too, they could assign an even lower P/E multiple of 10x, which is 15% lower than the current level of ~12x. This would mean a double whammy of 23% lower earnings and a 15% lower P/E multiple, translating into DuPont’s price drop of 35%, to about $30 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse over the next few quarters, and as the coronavirus crisis is tamed, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

The situation is comparatively better for other sectors, including pharmaceuticals, such as Merck, which appears to be oversold at the current levels.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies, including Union Pacific and Adobe. The complete set of coronavirus impact and timing analyses is available here.

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