Raising DuPont's FVE to $94 on Strong Q2 Results
The firm is well positioned to capture sales and profit growth from multiple favorable trends.
DuPont (DD) reported strong second-quarter results, as operating EBITDA was up 53% year on year versus the prior year quarter. While we had previously forecast much of the postpandemic recovery to occur this year, we have slightly increased our near-term outlook, driven by higher sales growth in all three segments. Separately, we have increased our average effective tax rate for DuPont to reflect our assumptions for a higher U.S. corporate tax rate. After updating our model to reflect these changes, we raise our DuPont fair value estimate to $94 per share from $92. Our narrow moat rating is unchanged.
Despite DuPont's strong quarter and management raising guidance, the market reacted negatively to DuPont's earnings, with the stock down 1.5% at the time of writing. In our view, the market reacted negatively to management saying higher raw materials costs would weigh on second-half results. While higher raw materials costs can affect profits over a quarter or two, DuPont will be able to fully pass along price increases, which should result in little long-term effect on profits.
However, we view the lower share price as an opportunity. Since hitting a 52-week high earlier in the year, DuPont shares have fallen 15%. We think this presents long-term investors with a good entry point for a quality name. We view DuPont shares as significantly undervalued, with the stock trading firmly in 4-star territory.
Over the long term, we continue to view DuPont as well positioned to capture sales and profit growth from multiple favorable trends. This includes greater electric vehicle adoption, an increased number of 5G-enabled devices, growing demand for water filtration products, and the long-term growth in U.S. housing starts.
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Seth Goldstein does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.