The market usually likes it when an activist investor starts rattling a company’s cage, as Nelson Peltz’s Trian Fund Management is doing with E I Du Pont De Nemours And Co (NYSE:DD) — or just DuPont — but not when the underlying business looks bad.
Bank of America Merrill Lynch slashed its rating on DuPont stock to “underperform” (essentially a call to sell) from “buy” on Monday, and shares plummeted in the aftermath. The analyst cited a host of issues for the downgrade, including a likely drop in corn acreage planted, risk in Ukraine, a move by growers to cheaper seeds and the stronger U.S. dollar.
Interestingly, BofA/Merrill Lynch says the biggest risk to its more cautious stance on DuPont stock is a win by Nelson Peltz.
Peltz, underwhelmed by DuPont’s share performance, has launched a proxy war against the chemicals conglomerate. Originally seeking four board seats, Trian has scaled back to pushing for two members on the DD board, and two on its soon-to-be spun off Chemours unit.
The main issue is that Peltz wants this component of the Dow Jones Industrial Average to break itself up. And he may have a good point. It’s not unusual for companies to spin off their faster-growing divisions from their more mature operations — as Peltz wants to do with DuPont’s agriculture business. It’s also not hard to imagine that DuPont is awash in unnecessary costs — $4 billion by Trian’s count — and is impossible to manage because of organizational complexity and bureaucracy run amok.
If Peltz were to implement just the cost cuts, that alone would act as a tailwind for DD stock. (If history is any guide, Trian will come to a settlement with DuPont.)
DuPont Looks Played Out
DuPont stock hasn’t been a terrible holding these last few years. Since stocks bottomed out in March 2009, DD is up 370% vs. a 200% gain for the S&P 500. DuPont stock is a market-beater for the last five years, as well. However, DuPont has largely lagged the broader market over the three-year period, and until recently, were struggling to keep up with the broader market over the past 52 weeks.
Apparently that’s not good enough for Trian. Fine. But anyone who bought DuPont stock based on Peltz’s involvement would do well to hike those stop-loss orders. It’s not a secret that much of DuPont’s upside this year — a 9% gain before the downgrade — was a bet on some kind of Peltz victory.
Indeed, given how DuPont stock reacted to the downgrade, it looks like most if not all of the upside from such an outcome was already baked in; DD tumbled nearly 5% on the rating cut. That’s a big move for a stock with a market cap of $68 billion.
Sure, DuPont stock might bounce back some on any progress made by Trian, but it sure doesn’t look like it will amount to much. And even if Peltz were to win those board seats, there isn’t much Trian can do about the macro issues confronting DD.
Bottom Line
As nice as Peltz has been for some short-term gains for DuPont stock, it looks to be played out. Meanwhile, the fundamentals are deteriorating. That makes BofA/Merrill Lynch’s sell call a smart move.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
