The Market's Too Cautious on DuPont and Corteva
We think investors' fears about liability issues are overblown.
While chemical industry investors are paying attention to sustainability risks, sizing the valuation impact to companies from environmental cleanup has proved difficult and created market uncertainty. The risks are intensifying. Lawsuits over health issues and cleanup costs related to polyfluoroalkyl substances have been piling up over the last year and have driven the shares of DuPont (DD) and Corteva (CTVA) lower as investors worry about potential liabilities. Federal regulations in the next several years are likely to drive even more lawsuits and cleanup costs. The chemicals in question are on the same trajectory as asbestos in the early 1970s, and like asbestos, they have created a hazard to investors. We ultimately see nearly $40 billion in remediation costs industrywide, stoking investor fears of increased bankruptcy risk.
However, we think the market is overly pessimistic on the impact to DuPont and Corteva, as their predecessor company never sold the chemicals. We estimate just over $3 billion in remediation costs will fall to them--roughly 5% of their combined market capitalization. Meanwhile, the underlying businesses of the two companies should enjoy several tailwinds, including a rise in vehicle electrification and 5G for DuPont and the launch of several new premium products for Corteva. Where consensus sees caution, we see opportunity for long-term investors to pick up cheap shares of two quality companies.
Seth Goldstein does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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