Activist investor cuts DowDuPont expectations ahead of split into three companies

Activist investor Dan Loeb is trimming his expectations for DowDuPont Inc. just as the chemical giant prepares to break itself into three companies.

Last May, Loeb's Third Point hedge fund said in a letter to investors that the pending split could propel DowDuPont to $92 a share, closing a "value gap" of almost 50 percent. Instead, the shares lost value, and a cooling global economy has tempered Loeb's view. Third Point now sees $80 as a more realistic 12-month target on a sum-of-its-parts basis, according to a person familiar with matter. A representative for Third Point declined to comment.

The first spinoff of the triumvirate is just two months away, and it's set to begin in a weakening macroeconomy with a crumbling earnings outlook for plastics. Shares have plunged 19 percent in the 17 months since the merger of Dow and DuPont. A Standard & Poor's index of chemical makers is little changed in the same period.

"People have owned this name for a long time and it hasn't worked," said Aleksey Yefremov, an analyst at Instinet, who lowered his price target last week to $57.

DowDuPont fell 1 percent to $53.74 at 9:39 a.m. in New York as Cowen analyst Charles Neivert downgraded his recommendation to hold from buy and cut his price target to $59. The shares fell to a two-year low of $49.09 on Dec. 24, and they're the second-worst performer this year on a Standard & Poor's index of chemical makers, which has advanced 4.7 percent.

Still, Third Point sees a nearly 50 percent gain from here, remaining bullish on the company's prospects and the pending split-up, the person said, asking not to be identified because the matter is not public. A key driver will be $3.6 billion of promised cost-savings working their way through the organization, the person said. The hedge fund also remains supportive of management, particularly Chief Executive Officer Ed Breen, the person said.

Yet the shares have lagged even as Breen has outrun earnings estimates and boosted his cost-savings target. The monster under the bed appears to be the weakening outlook for commodities, a big concern for the plastics-and-materials-science unit to be spun off April 1 under the Dow name. Demand for the division's products is softening, sluggish oil prices have weighed on the stock and the U.S. trade war with China is adding to the jitters.

Loeb was a sharp critic when he initiated Third Point's investment in Dow more than five years ago, calling for the chemical maker to be broken up and later demanding the ouster of then-CEO Andrew Liveris. The shares did well after Liveris and Breen in late 2015 agreed to merge their companies and create three spinoffs, a deal brokered by another activist investor, Nelson Peltz, co-founder of Trian Fund Management.

Trian exited its stake in the fourth quarter of 2017 as the shares approached their peak, while Loeb has held on through the downturn.

Third Point has already made a profit of about $450 million on its investment, including, among other things, share sales, options trading, and dividends, since taking its initial position in November 2013, according to the person. Its most recently reported stake of 12.15 million shares is valued at $659.3 million.

Loeb and other like-minded investors had banked on the idea that DowDuPont's many disparate businesses, ranging from polyethylene plastic to designer soybeans and solar-panel components, would be more highly valued as focused, standalone companies. Now analysts see commodity-heavy Dow as weighing on the whole package.

The numbers back them up. Falling oil prices and a weakening global economy cut fourth-quarter profit and margins in the Dow plastics business to a multiyear low, DowDuPont reported Thursday, a prelude to lower chemical earnings posted Friday by LyondellBasell Industries and ExxonMobil.

DowDuPont's forecast for a surprise drop in first-quarter earnings prompted JPMorgan Chase & Co. to downgrade the shares to neutral Feb. 1 and slash the share-price target by $12 to a Street-low $53. Such worsening views are eroding investor interest in the sector.

"Very few people want to own Dow or Lyondell or any kind of basic chemicals," said John Roberts, an analyst at UBS Group, who cut his price target to $73. "Until you actually get the parts spun off, there is something for anyone to complain about, in particular the Dow piece."

New buyers may be waiting on the sideline for the split up before they dive in, said Hank Smith, co-chief investment officer at Haverford Trust. Investors interested in owning Dow, or the Corteva agriculture business or DuPont specialty products can just wait until June 1 when each will be separately traded, he said.

"Some investors are thinking, 'Why the heck do I need to buy DowDuPont when in four or five months I can have my choice,'" said Smith, whose firm holds 2.17 million DowDuPont shares, according to data compiled by Bloomberg.

Investors shouldn't lose heart, said Jim Sheehan, an analyst at Suntrust Robinson Humphrey Inc. The full value of splitting up DowDuPont probably will be realized, but not until after the separations are complete.

"The bull thesis is largely correct," said Sheehan, who cut his price target to $57 on Feb. 1. "It's just a matter of timing it right."

The shares would probably be one of the biggest beneficiaries if the U.S. and China ratchet down trade tensions that are seen hurting Chinese growth, said Hassan Ahmed, an analyst at Alembic Global Advisors, who has a $90 price target.

"The macroeconomic paranoia hit epic proportions in the fourth quarter," Ahmed said. "With a China trade deal, they'd be the first to rebound."

Believers in the breakup value acknowledge being puzzled at why more investors haven't piled in to DowDuPont to catch the inevitable ride up.

"Everything that Dan Loeb and myself expected to happen inside the companies has happened. They are so much better today than they used to be,"said Jonas Oxgaard, an analyst at Sanford C. Bernstein.

But even Oxgaard, whose 12-month $90 price target makes him among the most bullish analysts on Wall Street, doesn't see the combined value of the spinoffs topping $70 in the next year amid the growing macroeconomic concerns.

"To get to $90, we need to get past the recession fears," he said.

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