Should You Buy DuPont Stock At $84?
We believe that the stock price of DuPont (NYSE:DD) looks expensive at current levels of around $84. DD stock has seen a large 3x move from the levels of under $28 it was at in March 2020, compared to the S&P which has moved up 84%. DD stock has significantly outperformed the broader markets, primarily due to a faster than anticipated rebound in the global economies, and the company delivering better than estimated results over the recent quarters. Now that the stock has seen a large move (up 85% in the last one year) despite revenue declining 3% y-o-y over the last four quarters, we believe DD stock has run ahead of its valuation, and it is vulnerable to downside risk. Our dashboard ‘Buy Or Fear DuPont Stock‘ provides the key numbers behind our thinking.
Looking at a slightly longer time period, DD stock is up 31% from levels of $64 seen toward the end of 2019. The rise in the stock price over the last one year or so can be attributed to favorable changes in the company’s P/S multiple. The company’s revenues have trended lower, declining 5% from $21.5 billion in 2019 to $20.4 billion in 2020, primarily due to the impact of the Covid-19 pandemic on the overall business. On a per share basis, the company’s revenues declined 4% from $28.94 in 2019 to $27.72 in 2020.
Despite a decline in revenue per share (RPS), the company’s P/S multiple expanded from levels of over 2.2x in 2019 to 2.6x in 2020. The P/S multiple has now further increased to 3.0x.
Outlook
2020 has been a tough year for several companies, and DuPont also faced challenges, primarily due to the impact of the Covid-19 pandemic on the automotive industry, resulting in a 15% drop in DuPont’s Transportation & Industrial segment sales. However, a continued demand for semiconductor technologies, probiotics, home & personal care, and animal nutrition offset some of the decline seen in DuPont’s other businesses. That said, the outlook for 2021 remains robust with the company providing a revenue guidance of $15.8 billion, while it expects full-year adjusted EPS to be $3.67. This compares with revenue of $15.5 billion and $3.57 guidance the company had provided earlier. The new revenue guidance reflects a low double-digit comparable growth to 2020. Note that the 2020 reported sales figure is not comparable to 2021 given that DuPont has merged its nutrition and biosciences business with IFF. The IFF transaction is good for the company, given it has garnered $7 billion in cash, and retired a large 27% of its shares outstanding. The company plans to use the proceedings to retire its debt by $5 billion. The company is also focused on share repurchases, bolstering the shareholders’ return.
DuPont recently announced increased investment at its manufacturing facilities in Germany and Switzerland to increase capacity for its high-performance automotive adhesives. The investment is aimed to enhance the capacity to support growing demand for advanced mobility solutions for electric vehicles. The automotive market is expected to see a sharp rebound as the current pandemic winds down, boding well for DuPont’s automotive business. Now that several countries are focused on large scale vaccination programs, with 47% of the U.S. population having received at least one dose of Covid-19 vaccine, the economies are expected to rebound going forward, boding well for DuPont’s other businesses, including semiconductor technologies, and water filtration, among others, as well.
That said, much of these positives appear to be already priced in DD stock, given a large 3x rally off the March 2020 bottom. At the current levels of $84, DD stock is trading at 3.2x its expected RPS of $26.10 in 2021, compared to levels of 2.2x seen in 2019 and 2.6x seen as recently as late 2020. As such, we believe that DD stock is vulnerable to downside risk.
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