DowDuPont's (NYSE: DWDP) miserable 2018 stock performance accelerated in October, with shares of the chemicals giant falling 16.2% for the month, according to data provided by S&P Global Market Intelligence. The steep decline left DowDuPont down 24% on the year, ahead of only IBM among Dow Jones Industrials Index components.
The company just entered year two of a complex plan that merged two of the best-known names in the chemicals business, only to eventually split in three. It hit the skids mid-month after announcing it would take a massive $4.6 billion impairment charge in the third quarter related to goodwill and other assets in its agriculture unit.
A legacy Dow chemical plant in Germany. Image source: DowDuPont.
DowDuPont said that ag, which until recently was a key growth engine inside the portfolio, would not live up to cash flow projections due to "lower growth in sales and margins in North America and Latin America" and unfavorable currency exchange rates.
The charge gave credence to one of the biggest fears hanging over DowDuPont shares: that the company in its current form is too complex to fully comprehend.
DowDuPont was formed in September 2017 via a $130 billion merger between Dow Chemical and DuPont, with plans to cut combined annual costs by more than $3 billion while grouping related Dow and DuPont businesses into three more-focused stand-alones.
If all goes to plan, by mid-2019 current holders will own shares of three publicly traded companies: Corteva Agriscience, the combination's farm-focused unit; a rechristened Dow, which will house the combined materials-science business; and a new DuPont, which will contain the companies' specialty-products units.
The strategy makes sense, but the execution is no small feat. Mergers are almost always fraught with dangers. Given the complexity of the two portfolios, it's hard to say with any confidence that the split will proceed on schedule and as planned, or whether some other unanticipated challenge or charge will surface.
DowDuPont was able to ease some concerns on Nov. 1 when it reported third-quarter earnings per share that beat estimates, on revenue that, at $20.1 billion, was $100 million short of expectations. The company reported strong demand in its cosmetics, plastics, and paints divisions, and said it intends to repurchase $3 billion in shares over the next five months leading up to the split.
CFO Howard Ungerleider, on a call with investors following the earnings, addressed another simmering fear, saying that DowDuPont does not expect tariffs to have a material impact on any of its businesses in the fourth quarter. After a disastrous October, shares are up 9% so far in November, though they still trail the S&P 500 by more than 20 percentage points for the year.
Given the uncertainty surrounding DowDuPont, it wouldn't be a surprise to see the shares underperform until the split is complete. Buyers who wait can avoid getting tripped up by any other unexpected charge uncovered in the integration process, and they will be able to cherry-pick among three focused businesses depending on what the economy is doing next year and the prospects for each unit.
This is a story best watched from the sidelines.
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