Is It A Dog? A Diamond In The Rough? Wall Street Weighs In On DuPont’s Chemours Spinoff

One of the attractions of spinoffs is that they tend to be underfollowed companies out of the gate. Of course, that isn’t always the case and DuPont’s (DD) recent Chemours (CC) spin has sure gotten plenty of attention although most of it hasn’t been so great.

Wall Street’s opinions started rolling in about a week prior to the spin’s completion and there were a number of concerns, with the expected size of the company’s dividend payout sitting atop the list. Prior to the spin, DuPont committed the company to an outsize dividend in order to maintain the same payout post-spin, but it seems a bit much for the spinco. Barron’s highlighted two Credit Suisse analysts who noted that Chemours is a cyclical business saddled with a hefty debt load. As if that wasn’t enough of a cash crunch, the company has also CapEx commitments and environmental cleanup to perform. Basically, they think the big dividend is not long for this Earth and expect Chemours’ new management to cut the payout. That would be quite a quick aboutface from the company and potentially an embarrassment for DuPont management given its recent public proxy battle.

CS wasn’t the only bank nervous about the company though. JP Morgan’s Jeffrey Zekaukis slapped an Underweight rating on the name noting the company’s cash flow issues and high amount of leverage. He also does not think the dividend is sustainable and also expects it to be cut shortly. Despite the negativity, he put a price target of $16 on the name which is still ~25% above the current price. The same piece also quotes a Jefferies analyst basically saying ditto on the dividend.

Not everyone is a Negative Nellie though. Barrons (noticing a trend here?) highlighted Barclays’ Duffy Fischer as a rare optimist and Mr. Fischer thinks the company has ~100% of upside from its recent price:

There are few quality assets in our space that trade meaningfully below asset value; that makes CC a unique opportunity. We value Chemours’ TiO2 business at $38/shr, its Fluoro products businesses at $17/shr and its Chem. Solutions business at $4/shr; subtracting net debt of $20/shr, Corp Exp of $5/shr and environmental of $5/shr leaves $29/shr for equity owners…

Deep value (for best in class assets) is rare. We think the confluence of the spin + weakening fundamentals + dividend issues lead to an attractive entry point. Chemours is not for the faint of heart with ~5.3x net debt to EBITDA and fundamentals that will likely get worse before they get better. However, given its low cost position, its ability to generate cash at trough, its new board able to set appropriate dividend, its potential for cost cutting & restructuring post spin, and the eventual recovery we see potentially 100% TSR in 3 yrs. We are initiating on Chemours with an Overweight rating and $24 PT.

Whatever the reason, Chemours has just been crushed since being set free and for awhile, it seemed to set fresh lows on a daily basis. Is the sell off valid or has it gone too far? Opinion appears divided…what do you think?

Disclosure: Author holds no position in any stock mentioned.