The Market Is Betting Big on DD - What's the Catch?

Shares of DuPont de Nemours (DD) jumped 6.7 % during today's afternoon session, bringing their 52 week performance to -9.7%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's poor growth indicators and market sentiment indicators.

DuPont de Nemours, Inc. provides technology-based materials and solutions in the United States, Canada, the Asia Pacific, Latin America, Europe, the Middle East, and Africa. The large-cap Basic Materials company is based in Wilmington, United States and has 28,000 full time employees.

DD Has a Higher P/E Ratio Than the Sector Average

Compared to the Basic Materials sector's average of 10.03, DuPont de Nemours has a trailing twelve month price to earnings (P/E) ratio of 24.3 and an expected P/E ratio of 15.6. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $3.17 or forward earnings per share of $4.94.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since DuPont de Nemours's P/E ratio is higher than its sector average of 10.03, we can deduce that the market is overvaluing the company's earnings.

DuPont de Nemours Is Fairly Valued in Terms of Expected Growth

Another factor pointing to DuPont de Nemours's value is its PEG ratio of 1.25. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.

DD Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For DuPont de Nemours, the P/B value is 1.5 while the average for the Basic Materials sector is 2.08.

DD's Weak Cash Flow Generation Is Troubling

The table below shows that DuPont de Nemours is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in DuPont de Nemours's case, free cash flow is growing at an average rate of 94.7% with a coefficient of variability of 1127.8%. We can also see that cash flows from operations are evolving at a 73.2% rate, versus 51.7%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 2,281 -3,237 -956 -133.77
2020-12-31 4,095 -1,264 2,831 323.26
2019-12-31 1,409 -2,677 -1,268 n/a

DuPont de Nemours's Is a Profitable Business

If you are looking to make DD a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively DuPont de Nemours is run.

DuPont de Nemours's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 16,653 10,803 35.13 4.21
2020-12-31 20,397 13,522 33.71 -2.74
2019-12-31 21,512 14,056 34.66 n/a

DuPont de Nemours's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 16,653 3,198 15.93 95.7
2020-12-31 20,397 5,214 8.14 -37.19
2019-12-31 21,512 4,668 12.96 n/a

DuPont de Nemours's cost of revenue is growing at a rate of -12.0% in contrast to -13.5% for operating expenses. Sales revenues, on the other hand, have experienced a -11.8% growth rate. As a result, the average gross margins growth is 0.7 and the average operating margins growth rate is 29.3, with coefficients of variability of 2.1% and 31.9% respectively.

We See Mixed Market Signals Regarding DD

DuPont de Nemours has an average rating of buy and target prices ranging from $108 to $76. At its current price of $77.18, the company is trading -15.91% away from its target price of $91.78. 3.7% of the company's shares are linked to short positions, and 75.0% of the shares are owned by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 40,974,845 2022-09-29 8% $3,162,438,549
Blackrock Inc. 34,622,936 2022-09-29 7% $2,672,198,211
Massachusetts Financial Services Co. 24,319,952 2022-09-29 5% $1,877,013,902
State Street Corporation 20,380,481 2022-09-29 4% $1,572,965,529
FMR, LLC 17,170,750 2022-09-29 3% $1,325,238,490
Boston Partners 12,500,001 2022-09-29 3% $964,750,080
Geode Capital Management, LLC 10,105,504 2022-09-29 2% $779,942,801
Macquarie Group Limited 7,915,513 2022-09-29 2% $610,919,295
Nuveen Asset Management 7,275,158 2022-09-29 1% $561,496,696
Morgan Stanley 7,198,298 2022-09-29 1% $555,564,641
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.