Chemical and agricultural companies don’t typically generate much exciting headlines. However, when you’re DowDuPont (NYSE:DWDP) and own the world’s largest chemical company, things are quite different. Not only that, Dowdupont stock is about to finish a major breakup of its organizational structure.
Specifically, DWDP will split off into three different companies. First, the Dow (NYSE:DOW) brand has once again received its own separate name. With the spin-off, Dow will focus its business as a commodities chemical producer.
Second, and somewhat confusingly, Dowdupont has also kept its brand name. However, the underlying company which DWDP stock represents will direct efforts toward specialty chemicals.
The third entity is a bit of a wildcard. Called Corteva Agriscience, it combines Dow’s original crop-chemical’s division, and DuPont’s agricultural seeds unit. The spinoff also includes biotechnology traits and crop-protection chemicals.
With so much in the cards for Dowdupont stock, the chemical specialist’s upcoming first quarter of 2019 earnings report will likely incur significant scrutiny.
Guidance for Dowdupont Stock to Dominate Discussions
DWDP releases its fiscal results on Thursday, May 2 before the opening bell. Analysts expect earnings per share to come in at 84 cents. This is near the low end of individual forecasts, which range between 74 cents to 98 cents. Of course, this is no surprise as the organization is in the middle of a major realignment.
On the revenue side, we’re talking more of the same. Covering analysts forecast revenue of $8.85 billion, which is down nearly 59% from the year-ago quarter ($21.5 billion).
Due to the many moving parts, it’s difficult to determine what an earnings beat would translate to for Dowdupont stock. Instead, I think guidance determines everything. Wall Street will want assurances that the much-anticipated split will generate meaningful returns for the separated entities.
In theory, the three-way split is beneficial for DWDP stock and the newly-christened DOW stock. Prior to the break-up, DowDuPont’s agricultural business weighed down the giant conglomerate. Freeing itself from this liability potentially gives DWDP a less-congested lane to drive.
Moreover, the domestic agricultural business is suffering sharp declines. Under this backdrop, a leaner, meaner Dowdupont stock should appeal to contrarian investors. Plus, it currently pays out a generous dividend. However, these factors alone may not convince many other prospective buyers to jump onboard.
Markets Simply Don’t Like DWDP Stock
For all the talk about a brighter future for DWDP stock and its split-off cousin, DOW, the numbers don’t back up the enthusiasm. Sure, DOW enjoyed a massive burst of upside momentum when it launched as a separate, tradable equity on March 20. However, recent trades in my opinion don’t justify the risk.
For example, after the close of April 4, DOW stock lacks confidence in its trajectory. Shares have flashed between extreme optimism and pessimism. Since the aforementioned closing date, DOW has shed 7.5%.
Dowdupont stock isn’t doing much better. Yes, DWDP shares are up over 8% year-to-date. But since January 23, the company’s equity hasn’t generated meaningful gains. Like DOW, we see multiple gyrations on the technical charts, but little to show for the effort.
Frankly, this doesn’t look like an appealing argument for Dowdupont stock.
Fundamentals Don’t Look Great for DWDP, Either
Everybody within the cogs of the great breakup is talking a big game, as they should. Like I said before, in theory, the separation benefits the three entities. Unlike in the previous arrangement, the respective management teams can focus on their core businesses.
Unfortunately, none of the core businesses have great fundamentals, and I’m not just referring to agriculture’s well-known problems. Revenue for the global chemical industry flatlined at around $5.1 trillion between 2011 and 2016. In 2017, revenues dipped to a shockingly low $4.3 trillion.
In other words, Dowdupont stock will certainly benefit from its new, leaner structure. But with the underlying industry also going on a diet, I’m not sure if the restructuring is enough.
Of course, the flipside to the bearish argument is that both agriculture and chemicals represent vital industries. As humans, we’ve got to eat. As a digitalized society, we still need specialized chemicals to actualize our innovations.
But the bottom line is that investor sentiment is all over the map. Additionally, the pensiveness is justified. With neither the fundamentals nor technicals looking too hot, I’d be on the sidelines for DWDP stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.