DuPont reported better than expected third-quarter results Tuesday morning, with net sales increasing 18% YoY or 16% on an organic basis to $4.3 billion, beating estimates of $4.159 billion. Operating EBITDA grew 20% YoY to $1.09 billion with margins expanding 50 basis points, and adjusted earnings per share of $1.15 exceeded estimates of $1.12.

It’s impressive to see DuPont deliver results net sales, operating EBITDA, and adjusted EPS above the high end of their third quarter guidance considering the economic slowdown, supply chain challenges, and inflationary forces that plagued the results of many other industrials in the quarter. For these reasons, we consider DuPont’s third quarter results to be superior to its peers.

DuPont generated $634 million of free cash flow at a conversion of 112% and bought back $500 million shares in the quarter, leaving management with $875 million remaining under its existing authorization.

DuPont also announced a series of strategic actions that will speed up the top-line growth rate with higher margins and less cyclicity. We’ll discuss the $5.2 billion acquisition of Rogers Corporation and the planned divestment of the substantial portion of the Mobility & Materials segment after we wrap up the quarter and guidance.

By segment Electronics and Industrial (E&I) net sales increased 9% organic (all on volumes) to $1.467 billion, edging estimates of $1.436 billion. DuPont highlighted double-digit volume growth in Industrial Solutions and Semiconductor Technologies, while Interconnect Solutions was weak with sales negatively impacted by the timing shift in demand related to premium, next-gen smartphones to the first half of the year and softness in auto. The Laird acquisition performed better than expected, and the strong results from this recent deal should make investors confident about DuPont’s ability to integrate Rogers. Segment operating EBITDA increased 13% YoY to $475 million, beating estimates of $460 million. Operating EBITDA margins contracted 230 basis points to 32.4% but essentially flat were flat when excluding a technology sale in the prior year.

Water & Protection (W&P) reported organic sales growth of 11% as net sales increased to $1.397 billion, missing estimates of $1.414 billion, as volumes increased 9% and price increased 2%. Management highlighted double-digit organic growth in Safety Solutions and high single-digit organic growth in Shelter Solutions (a good play on residential construction and DIY applications). However, continued logistics headwinds limited the broad-based demand for water technologies. Operating EBITDA grew 12% to $353 million and fell short of the $356 million estimates despite margin improving 20 basis points to 25.3%.

And in Mobility & Materials (M&M), net sales increased 28% on an organic basis to $1.298 billion, beating estimates of $1.204 billion, as organic volumes grew 12% thanks to continued demand from auto component manufactures, while price increased 16% reflecting pricing actions to offset raw material costs and higher pricing. Operating EBITDA increased to $280 million, beating estimates of $269 million, as margins expanded 550 basis points to 21.6%.

Outlook

Despite the better than expected quarter, management slightly lowered its full-year outlook. Unlike other industrials, DuPont is not having a problem with raw costs as the company plans to implement additional price increases to offset raw material inflation and remain price-cost neutral for the year. Instead, DuPont’s guidance revision was largely due to chip shortages impacting automotive end-markets, a well-documented, and understood issue by the market that is reflective of IHS lowering its second half 2021 global auto builds estimate by 17%. DuPont Executive Chairman and CEO Ed Breen reinforced the notion that the rest of the business is performing well at the moment when he said on the earnings call that “there’s no softness anywhere else in the portfolio.”

Management now anticipates net sales to be in the range of $16.34 billion to $16.40 billion, down from $16.45 billion to $16.55 billion and slightly below estimates of $16.432 billion. Operating EBITDA is expected to be in the range of $4.14 billion to $4.17 billion, down from the previous range of $4.21 billion to $4.26 billion and below estimates of $4.19 billion. Lastly, adjusted earnings per share is now expected to be in the range of $4.18 to $4.22, down from $4.24 to $4.30 and below estimates of $4.25.

The guidance cut may mean analyst estimates for 2021 will be coming down, however we are thinking of this as more of a push out of earnings to 2022 as the underlying demand for autos is strong with auto builds estimated to increase 11% next year.

Portfolio Action

DuPont also announced two strategic actions Tuesday morning, an acquisition and planned divestment, that further the company’s transformation into a less cyclical, faster growing, higher margin, multi-industry company. The executive orchestrating these portfolio changes is CEO Breen, a serial dealmaker who is always tinkering with his portfolio and thinking of new ways to create long-term value for shareholders.

First up, DuPont said today it has entered into a definitive agreement to acquire Rogers Corporation (ROG) for $5.2 billion. Rogers is a global leader in engineered materials and components with a strong positioning in select high-performance products in Advanced Mobility and Advanced Connectivity.

DuPont believes this acquisition increases their exposure to several high-growth markets, including electric vehicles, a market growing at 30% per year, and ADAS, a market growing at a mid-teens rate. The total addressable market for DuPont’s E&I business will expand to about $40 billion, or 1.5x its prior level, following the combination. This complimentary deal will strengthen DuPont’s reach in its fast-growing segments.

The $5.2 billion purchase price puts the business at a hefty ~19x 2022 EBITDA, but management believes the true multiple is closer to 14x after you factor in cost synergies. That purchase multiple could be worked down even further when you include the possibility of revenue synergies, which DuPont believes could be significant, but they conservatively left off their model. The transaction is expected to be accretive to top-line growth, operating EBITDA, free cash flow, and adjusted EPS at closing, which is expected in the second quarter of 2022.

The second announcement DuPont made was that it plans to divest a substantial portfolio of its M&M segment. More specifically, the businesses DuPont plans to sell are predominantly those in the Engineering Polymers and Performance Resins lines of business as well as the company’s stake in the DuPont Teijin Films joint venture. The businesses not included in the scope of the divestiture include the automotive, adhesives, and multi-based businesses which DuPont believes “align nicely” with their offerings for electric vehicles and industrial technologies.

The portfolio DuPont plans to divest is expected to generate about $4.2 billion of revenue and about $1 billion of EBITDA in 2021. It's a good business with a solid outlook, but DuPont no longer believes it is the right owner of the asset. DuPont doesn’t want to be a commodity chemical company that is beholden to swings in feedstock pricing and subject to raw cost inflation anymore. Management wants less volatile earnings streams and the sale of this business to fund a secular growing asset will accomplish just that.

DuPont expects to take three to six months to market the business and is targeting a closing date of the fourth quarter of 2022. The company plans to use the divestment proceeds to fund M&A, including the Rogers acquisition, and potentially buy back shares.

Importantly, Breen thinks the M&M business will fetch a good price in the market because the interest of others is already there. On the call, Breen said M&M is the lowest multiple business in the company, yet he plans to sell it at a higher multiple than what DuPont trades at today. This is how a CEO unlocks value within a portfolio and gets the stock trading closer to a higher sum-of-the-parts valuation.

From a financial perspective, DuPont thinks the combination of the two deals will accelerate top line growth and operating EBITDA margins. DuPont also thinks the moves will make earnings less cyclical and more stable, and we think this could be a multiple expanding event over time if proven accurate. Lastly, DuPont believes the combined transactions will stack the new company quite favorably against its best-in-class multi-industrial peers.

You have to check out the company’s slide deck presentation to get a better view of how the two deals better position DuPont for the future.

Bottom Line

Overall, a solid quarter from DuPont that outperformed expectations. Even though guidance for the fourth quarter was light, we think the market understood a revision was coming with shares already trading well off their highs coming into the print.

Earnings are always important, but the story with DuPont today is the announced strategic actions. Through the two planned deals, Dupont is swapping cyclicality for secular growth and doubling down on their five core foundational pillars of electronics (33% end market exposure), water (10%), protection (20%), industrial technologies (24%), and next-gen autos (13%.) We cannot help but like the fact that DuPont is becoming a more focused company with better growth at higher margins.

DuPont may be paying a hefty price for Rogers, but we believe it is well worth its price tag when taken in the full context of the significant, transformational changes DuPont is making to its portfolio.

With DuPont shares trading roughly 9% higher at the time this was written, we are pleased to see management finally get credit for their transformative actions and business performance.

We’ll hear more about the quarter, the outlook, and what the strategic actions mean for the future of DuPont when CEO Ed Breen appears of “Mad Money” Tuesday.

(Jim Cramer's Charitable Trust is long DD.)