DowDupont, Inc.

DowDuPont, (DWDP) a holding company comprised of The Dow Chemical Company and E. I. du Pont de Nemours and Company, is a diversified manufacturer and supplier of products used primarily as raw materials in the manufacture of products and services for companies in the appliance; automotive; agricultural; building and construction; chemical processing; electronics; furniture; housewares; oil and gas; packaging; paints, coatings and adhesives; personal care; pharmaceutical; processed foods; pulp and paper; textile and carpet; utilities; and water treatment industries. Industry peers include BASF, Monsanto Company, and Ashland Global Holdings.

Short-Term Value

My short-term (3-6 week hold) target price for the stock is $73.04, with an initial trailing stop at $64.17. Upward price movement will find resistance at $66.67 and $67.72, with final resistance at $70.26. Downward price movement will find support at $64.38 and at $63.24.

Days to Cover

The most recent days to cover number is 2. The days to cover number is a measurement of the company’s outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is sometimes used as a volatility precursor for a stock.

The Tax Act

The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.

In the case of DowDupont, Inc., the provisional amount recorded related to the remeasurement of the company’s deferred tax balance was $2,666 million, recorded as a benefit to provision (credit) for income taxes on continuing operations.

The Act also requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (“E&P”), which results in a one-time transition tax. As a result, the company recorded a provisional amount for the transition tax liability for its foreign subsidiaries of $1,580 million, recorded as a charge to provision (credit) for income taxes on continuing operations.

Note that for fiscal 2017, 0% of net income came from income tax benefits.

Insider Transactions

In the past 12 months, the company reported 236 insider trades involving 7,482,742 shares of stock. Of those 236 insider trades, 115 were Buys involving 2,119,296 shares of stock, and 121 were Sells involving 5,363,446 shares of stock, creating an insider buy to sell ratio of 0.4 to 1.

Acquisitions/Mergers

In March 2017, DuPont entered into a definitive agreement with FMC Corporation for FMC to acquire the assets related to DuPont’s crop protection business and research and development (“R&D”) organization that DuPont was required to divest in order to obtain European Commission (“EC”) approval for the merger with Dow. In addition, under the FMC Transaction Agreement, DuPont agreed to acquire certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products (the “H&N Business”) (the sale of the Divested Ag Business and acquisition of the H&N Business referred to collectively as the “FMC Transactions”).

In November 2017, DuPont completed the FMC Transactions through the acquisition of the H&N Business and the divestiture of the Divested Ag Business. The acquisition will be integrated into Nutrition & Biosciences to enhance the Company’s position as a leading provider of sustainable, bio-based food ingredients and allow for expanded capabilities in the pharma excipients space. DuPont accounted for the acquisition in accordance with ASC 805, which requires the assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date.

Divestitures/Dispositions

In February 2017, Dow announced it would divest the EAA Business to SK Global Chemical Co., Ltd. The divestiture included production assets located in Freeport, Texas, and Tarragona, Spain, along with associated intellectual property and product trademarks. Under terms of the purchase agreement, SK Global Chemical Co., Ltd will honor certain customer and supplier contracts and other agreements. In September 2017, the sale was completed for $296 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments.

In July 2017, Dow announced it had entered into a definitive agreement with CITIC Agri Fund to sell the DAS Divested Ag Business, including four corn seed production sites and four research centers, a copy of Dow AgroSciences’ Brazilian corn germplasm bank, certain commercial and pipeline hybrids, the MORGAN™ trademark and a license to the DOW SEMENTES™ trademark for 12 months. In November 2017, the sale was completed for $1,093 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments.

DuPont was required to sell its Divested Ag Business, specifically DuPont’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including RYNAXYPYR®, CYAZYPYR®, and Indoxacarb as well as the crop protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs. In March 2017, DuPont and FMC entered into the FMC Transaction Agreement under which FMC agreed to acquire the Divested Ag Business; in addition, DuPont agreed to acquire the H&N Business. The sale of the Divested Ag Business meets the criteria for discontinued operations and as such, earnings are included within loss from discontinued operations, net of tax for periods subsequent to the Merger.

In November 2017, DuPont completed the FMC Transactions through the disposition of the Divested Ag Business and the acquisition of the H&N Business. The preliminary fair value as determined by DuPont of the H&N Business is $1,970 million. The FMC Transactions include a cash consideration payment to DuPont of approximately $1,200 million, which reflects the difference in value between the Divested Ag Business and the H&N Business, as well as favorable contracts with FMC of $495 million, subject to adjustments for inventory of the Divested Ag Business and net working capital of the H&N Business. Due to the proximity of the Merger and the closing of the sale, the carrying value of the Divested Ag Business approximated the fair value of the consideration received, thus no resulting gain or loss was recognized on the sale.

Year-Over-Year

Several year over year metrics of interest are revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and year to date price growth. For DowDupont, Inc., revenue increased by 30%, earnings decreased by 1%, free cash flow increased by 20%, total debt decreased by 59%, and the stock price increased by 20%. Year to date the stock price is down 9%.

Future Value

My future (5-year hold) target price for the stock is $115, which is an average annual return of 15%. A prior five-year hold of the stock (FY2013- FY2017) would have returned an average of 25% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value

As an on-going concern, my baseline valuation for the company is $41. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value for the stock is $32. The fair value number is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of an AAA-rated corporate bond. Value investing buy, sell, and close targets are derivatives of fair value.

Value Considerations

Other value considerations include the PE Ratio, the PEG Ratio, Book Value, and Tangible Book Value. For DowDupont, Inc. the current twelve-month trailing PE Ratio is 25, the PEG Ratio is 3.6, Book Value is $44, and Tangible Book Value is $4.

Fair Warning

A fair warning means that the time for bidding has ended and an exchange is about to be concluded. DowDupont, Inc. (NYSE: DWDP) – FYE 12/2017 – Overvalued. The stock is currently trading at levels above my most recent $51 close target. Please See Linked PDF Worksheet