DuPont's biggest businesses get stronger and a key catalyst may arrive sooner than thought

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DuPont shares jumped Tuesday after the Club holding reported a solid set of third-quarter results, raised earnings guidance and told investors that a key catalyst for the stock could arrive sooner than some expected. The report showed why we’ve stuck with DuPont this year despite frustration on its stock performance. Net sales in the three months ended Sept. 30 rose 4.4% year over year to $3.19 billion, a hair short of the $3.2 billion estimate, according to LSEG. Organically, sales were up 3% versus the year-ago period. Adjusted earnings per share (EPS) increased 28.3% year over year to $1.18 per share, exceeding expectations of $1.03 per share, LSEG data showed. Operating EBITDA of $857 million in the quarter came in ahead of the $818 million consensus, according to FactSet. EBITDA — a measure of profitability — is short for earnings before interest, taxes, depreciation, and amortization. Shares rose nearly 6% Tuesday, to nearly $87 a share. DD YTD mountain DuPont’s year-to-date stock performance. Bottom line DuPont delivered a very good report Tuesday that gives us the confidence to reiterate our 1 rating and price target of $100 a share. DuPont’s performance on profitability metrics shined, with the better-than-expected operating EBITDA and earnings results for the quarter compounded by an increase to management’s full-year outlook on both metrics. Profit margin performance was also strong, as was cash flow generation, with transaction-adjusted free cash flow conversion of 130% — a sign of healthy of earnings. DuPont defines that metric as adjusted free cash flow excluding transaction costs associated with its impending business separation divided by adjusted earnings. While sales in its water-and-protection unit came up short of expectations, the miss there was more than offset by the beat in electronics-and-industrial sales. That’s important to note because it means sales at DuPont’s two core units — excluding the corporate-and-other segment — on a combined basis were actually better than expected, helped by recovery in China. The world’s second largest economy has recently been a headwind for DuPont and a host of other U.S. companies doing business there. The corporate-and-other line includes retained businesses from the previous divestiture of DuPont’s mobility-and-materials operations, which aren’t really the focus of investors. It’s also much smaller than its two counterparts. DuPont Why we own it: We added this specialty chemical maker as an industrial way to play the recovery in the semiconductor and electronics industries, which have strong multiyear outlooks due to advancements in AI. The company also is getting past excess inventory issues in a few business lines. More recently, DuPont’s plan to split itself into three separate companies has sweetened the investment case. Competitors : 3M , PPG Industries Portfolio weighting: 3.49% Most recent buy: Aug. 5, 2024 Initiated : Aug. 7, 2023 In addition to the better-than-expected results for the core business, DuPont offered an encouraging update on its planned separation into three separate publicly traded companies — a crucial catalyst for the stock. Executive Chairman Ed Breen said DuPont is looking to get the breakup done closer to the shorter end of the 18-to-24-month timeline offered when the plan was disclosed in May . If the transaction is in fact finalized closer to 18 months from the initial announcement, that would be around December 2025. The result will be a standalone company consisting of its water business, an electronics-focused firm tied to AI and the remaining DuPont, which serve the health care and construction markets, among others. We continue to view this as a smart way to ensure DuPont’s varied businesses are appropriately valued by investors, boosting the stock price as a result. While the stock may not fully reflect all of that value until the separation is complete — or at least until we get closer to and have more certainty on the date it will finally happen — patient investors will be rewarded. Quarterly results Another reason to look past the light water-and-protection sales: Operating margins at both of the core business units were ahead of expectations. That is an indication that while DuPont’s end markets are still in recovery mode, the businesses are being run more efficiently than expected. For the electronics-and-industrial segment, management said operating EBITDA was helped, in part, by increased volume gains along with savings from productivity and restructuring actions. The water-and-protection unit’s profitability was aided by productivity and savings from restructuring actions, which more than offset a decline in organic revenue and higher variable compensation. Diving into the electronics-and-industrial unit by end market: Semiconductor technologies sales advanced over 20% year over year on organic basis, driven by strong AI demand, including out of China. Interconnect solutions sales increased low-double digits organically thanks to the continued recovery in the consumer electronics end market as more devices are becoming AI-capable. For what it’s worth, that’s a positive readthrough for fellow Club holding Best Buy . Industrial solutions sales fell slightly on organic basis as weakness in Kalrez — which makes O-rings and specialty sealant products — was only partially offset by strength in printing and packaging applications. Now digging into the water-and-protection segment: Safety solutions revenues were down mid-single digits on an organic basis due to lower prices and a decrease in medical packaging products sales volume versus the year-ago period. Still, sales of medical packaging products were up 10% quarter over quarter, the second consecutive sequential increase and further evidence of a recovery in progress. Shelter solutions saw sales fall slightly on an organic basis as weakness in the North American residential construction market was only partially offset by increased activity in the commercial construction end market. Water solutions were up low-single digits organically as China continues to recover. Guidance Management raised its full-year guidance for operating EBITDA and adjusted earnings per share. However, its revenue forecast was tweaked a bit lower. The company now expects net sales to be about $12.365 billion, down from a prior range of $12.4 billion to $12.5 billion, and below the $12.43 billion expected by analysts, according to LSEG. The operating EBITDA guide was raised to about $3.125 billion, up from a prior range of $3.06 billion to $3.11 billion. That’s better than the $3.094 billion Wall Street was looking for, according to FactSet. Adjusted EPS is now projected to be about $3.90, exceeding the $3.78 consensus estimate, according to LSEG. DuPont had previously offered a range of $3.70 to $3.80 per share. For the fourth quarter, DuPont guided to roughly $3.07 billion in sales, $790 million in operating EBITDA and adjusted EPS of 98 cents. All were weaker than expected. Analysts had been looking for $3.13 billion in sales and EPS of 99 cents, according to LSEG, and $797 million in operating EBITDA, according to FactSet. (Jim Cramer’s Charitable Trust is long DD and BBY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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A DuPont sign is shown at the company’s world headquarters in Wilmington, Delaware.

Jeff Fusco | Getty Images

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DuPont's biggest businesses get stronger and a key catalyst may arrive sooner than thought

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