Electronics Spin-Off Will Boost Future Industry Prospects

Key Takeaways

• The impending spin-off and restructuring could lead to initial uncertainties, costs impacting margins, and potential earnings reduction.
  
• Anticipated price and market demand fluctuations may exert pressure on revenue and create false confidence in growth sustainability.
  
• The spin-off and separation costs, along with potential dis-synergies, might introduce uncertainties impacting net earnings negatively during transition.

Catalysts

Provides technology-based materials and solutions in the United States, Canada, the Asia Pacific, Latin America, Europe, the Middle East, and Africa.

• The anticipated spin-off of DuPont's electronics business by November 1st, 2025, could initially lead to uncertainties and costs associated with restructuring, impacting net margins and delaying other strategic initiatives.
  
• A predicted 1% reduction in selling prices across 2025 could exert pressure on overall revenue growth, which may not be fully offset by expected volume improvements, thereby affecting net margins and earnings.
  
• Despite expectations for mid-single-digit organic sales growth in both the ElectronicsCo and IndustrialsCo segments, market fluctuations such as anticipated flat demand in the Chinese Semi market following a 40% growth in 2024 could limit revenue expectations.
  
• The projected dis-synergies from standing up two public companies and the costs related to the spin-off could create a substantial financial burden, potentially reducing earnings in the short term.
  
• Temporary volume gains influenced by pre-buying activity in the Semi segment, potentially not reflective of true end-market demand, may create false confidence in revenue sustainability, especially in an environment where long-term growth relies more heavily on normalized market conditions.

DuPont de Nemours Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on DuPont de Nemours compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming DuPont de Nemours's revenue will grow by 3.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.0% today to 13.2% in 3 years time.
• The bearish analysts expect earnings to reach $1.8 billion (and earnings per share of $4.23) by about April 2028, up from $743.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 35.5x today. This future PE is greater than the current PE for the US Chemicals industry at 17.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

DuPont de Nemours Future Earnings Per Share Growth

Risks

• The prebuy precipitated by new fab start-ups and potential tariff impacts may lead to reduced demand in the subsequent quarters, potentially affecting future revenue growth.
  
• The electronics segment experienced a $13 million gain from a technology license agreement, indicating reliance on non-recurring items to boost earnings, which might not sustain future net margins.
  
• The expected flat sales for Semiconductor in China for 2025, following a 40% growth in 2024, suggests stagnation in a key market, which could negatively impact both revenue and earnings.
  
• A projected 1% decrease in price in 2025, accompanied by absorption tailwinds, may result in pressure on net profit margins since the company expects these factors to be neutral on the bottom line.
  
• The spin-off of the Electronics business and the associated $700 million in separation costs, alongside a potential $40 million to $60 million in dis-synergies, could introduce uncertainties that may impact net earnings negatively during the transition period.

Valuation

• The assumed bearish price target for DuPont de Nemours is $71.91, which represents one standard deviation below the consensus price target of $87.39. This valuation is based on what can be assumed as the expectations of DuPont de Nemours's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $116.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $13.6 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 7.3%.
• Given the current share price of $63.06, the bearish analyst price target of $71.91 is 12.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.