Time To Buy The DuPont Dip?

On January 24th, DuPont (NYSE:DD) shares plunged by over 14% in a single trading session on news of softening demand from China. That caused the stock to reach levels not seen since the lows of 2022 and begs the question whether the bad news has been baked in and DuPont de Nemours will recover?

DuPont’s business is, for the most part, quite cyclical in nature so lower demand forecasts by management cannot be taken lightly. Indeed, the executive team stated clearly that both the top line and bottom line are expected to fall in Q1.

If this is just the beginning of a downward inflection, investors should remain skittish about the firm’s prospects to bounce back quickly but there are reasons to be optimistic about buying after the big dip in DD share price.

Why Bulls Can Be Optimistic

While there is not a whole lot management can do to pivot on a dime to offset the sales impact of falling demand, the leadership team at DuPont has been effective in many other areas which it does have control over.

Famously, DuPont has a rich history of innovation and an extensive patent portfolio across a wide variety of fields ranging from agriculture to bio-based materials. The intellectual property developed has generally emphasized high-value, specialized products that solve specific problems.

An example of the innovation demonstrated by the firm is in the area of materials science where DuPont has developed materials with enhanced properties whether its greater strength, improved heat resistance, or superior electrical conductivity. These materials have applications that span a wide variety of industries from aerospace to personal protective equipment.

That culture of innovation has earned the company a reputation as a market leader that can command premium prices that result in higher profit margins, and has the added benefit of fostering loyalty among customers that is crucial to long-term growth.

DuPont’s Business Model Is Getting Better

Although it is true that DuPont runs a cyclical business, it has evolved over time to cater to a wide variety of industries so any single sector downturn won’t necessarily materially impact its financials.

For example, DuPont serves customers in sectors that range from electronics to transportation and from construction to healthcare. By so doing, the business model has a natural hedge against market fluctuations. As one industry rises and another falls, DuPont has an innate cushion to support revenues and maintain financial stability.

The ability to serve different areas of the economy also means technologies developed in one sector can often find applications in others so a multiplier effect exists on R&D solutions. So too can the company jump on emerging trends more quickly than some of its rivals. Most of all, it leads to a more resilient business model.

And that success has led to international expansion with DuPont’s operations and sales spanning continents. As a result, the firm has a rare ability to respond more rapidly to local trends and, in turn, enhance its own reputation for capability and speed. The global reach also means it can tap new customer bases that further support revenues.

None of that would be possible without the firm’s expertise in supply chain management, an under-appreciated strength in DuPont’s arsenal. This operational trait permits DuPont both to keep costs in check and maintain healthy gross profit margins, which came in last quarter at 34.7%.

Will DuPont Stock Recover?

According to analysts, DuPont stock is likely to recover based on a cash flows analysis that forecasts upside to $77.44 per share, representing a 23.7% gain.

It seems analysts aren’t the only ones who are enthusiastic about DuPont’s prospects. The Board of Directors authorized a share repurchase scheme to the tune of $2 billion in the last few months. That shows management’s conviction that the share price was undervalued relative to its intrinsic worth.

Further confirmation of the stock’s future prospects comes from a discounted cash flow analysis that pegs fair value at $89 per share, a 39% hike from present levels.

Another positive for the company is that while revenues over the next 5 years are forecast to grow by just 2.2%, the consensus among analysts is that net income will rise at a much faster rate of 15.1%. If that materializes, the current price-to-earnings multiple of 30.8x may in fact be low relative to projected earnings, though in absolute terms it is clearly elevated.

The Good, Bad & Ugly of DuPont

If ever the phrase don’t catch a falling knife applied it would be to DuPont share price at this time. The stock has tumbled significantly and, to add to the woes, four analysts have downgraded forecasts. Those bearish assessments amplify the downbeat assessment on demand reported by management.

Nonetheless, profitability is still forecast over the coming twelve months and the long history of profitability as evident by quarterly earnings before interest and taxes consistently hovering near the $2 billion mark shows no signs of being interrupted.

Stable profits also mean that the dividend of 2.14% is unlikely to be in jeopardy, particularly given the low payout ratio of just 13%. As a result, income-oriented investors may well stick around for the regular quarterly payouts.

Add the passive income opportunity to the significant upside potential based on analysts assessments and a cash flows analysis, and the dip in share price now is likely going to be viewed in hindsight as an attractive buying opportunity.

For those who subscribe to Stanley Druckenmiller’s philosophy whereby solid fundamentals should be accompanied by a good looking chart, DuPont won’t make the cut because of the deteriorating financials and bearish looking chart. That means DuPont is likely a best fit for long-term oriented value investors who are not worried by short-term volatility or even necessarily timing the market.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.