DuPont

DuPont, Corteva, Qnity, and Chemours have reached a PFAS liability-related settlement with the state of North Carolina.

Why it matters: The settlement is for $455 million over 15 years. This is well below the $671 million settlement with the state of West Virginia in 2017 and in line with the $450 million settlement between Chemours and the US Department of Justice earlier this year. The settlement is in line with our forecast that DuPont, Corteva, Qnity, and Chemours will pay roughly $6.5 billion in total PFAS-related settlements over the long term. Under the liability-sharing agreement, Chemours will pay around 50% of PFAS-related liabilities. DuPont, Corteva, and Qnity will pay roughly 20%, 15%, and 15%, respectively.

The bottom line: We maintain our $165 fair value estimate for narrow-moat DuPont, $95 fair value estimate for wide-moat Corteva, and $150 fair value estimate for narrow-moat Qnity. We do not cover Chemours. The payments from the PFAS settlements are generally structured over a multiyear period, which reduces the annual cash outflow for the companies. Given the healthy balance sheets for DuPont, Corteva, and Qnity, we don't foresee any financial troubles from PFAS liabilities at this time. We view DuPont and Qnity as undervalued, with both stocks trading in 4-star territory. We view Corteva as fairly valued, with shares trading in 3-star territory.

Big picture: All four companies were part of DuPont when it manufactured PFAS chemicals, which were the key material in products such as Teflon. DuPont never sold PFAS chemicals on its own, but instead used them as building blocks to make other products. Because DuPont didn't sell PFAS chemicals, we see lower liabilities for the four related companies versus other firms that sold PFAS chemicals.

We maintain our $165 DuPont fair value estimate following the company's second-quarter results. Our forecast includes the aramid fibers divestiture to Arclin that closed in April for $1.2 billion in cash before taxes and fees, a $300 million note receivable, and a 17.5% equity stake in Arclin. Our weighted average cost of capital for DuPont is about 8%.

In 2026, we expect DuPont to generate mid-single-digit revenue growth, excluding the aramids divestiture, as the company sees solid growth in its healthcare and water technologies business offset by slower growth in its diversified industrials business.

Over the long term, we forecast companywide sales to grow at a mid-single-digit average annual rate during our five-year explicit forecast period, largely driven by healthcare and water technologies growth. As DuPont continues to develop new products, we forecast companywide operating EBITDA margins to expand from around 24% on a pro forma basis in 2025 to around 26%-27% at midcycle levels.

Our base case assumes that DuPont pays a total of $1.15 billion in PFAS-related litigation and cleanup expenses. This assumes the maximum liability under the agreement with Qnity, Corteva, and Chemours. This includes the $1.185 billion settlement in the class-action lawsuit with multiple US water districts that cover the majority of the US population and the $875 million settlement payment to the state of New Jersey. The $1.15 billion estimate includes the $400 million DuPont paid for its share of the US public water systems class-action settlement in 2023 and its share of the New Jersey settlement in 2026, which will occur over a 25-year period. Due to the unknown timing of PFAS payments, we assume the remainder of our liability assumption is paid over the next 15 years, which is in line with the 20-year agreement.

Although we forecast PFAS cleanup and litigation to cost $40 billion industrywide, we assume historical DuPont (which includes today's DuPont, Qnity, Corteva, and Chemours) faces a total of $6.5 billion in PFAS-related costs, with most expenses coming from former historical DuPont chemicals plants. We assume DuPont, Qnity, and Corteva pay a combined $2 billion over the next 20 years based on their agreement with Chemours. Based on the DuPont, Qnity, and Corteva liability-sharing agreement, DuPont and Qnity pay a combined 71% of all future PFAS costs, with DuPont taking 39% and Qnity taking 32%, and Corteva paying 29%. This results in around $1.15 billion in total litigation for DuPont.

In a downside scenario where DuPont sees a prolonged volume decline due to an economic slowdown, we would forecast revenue to be roughly flat, while operating EBITDA margin is in the low 20s, below our base-case assumptions. This scenario assumes DuPont's PFAS-related liabilities soar to around $3.5 billion as Chemours is unable to pay the escalating liabilities and files for bankruptcy, resulting in 39% of liabilities being transferred to DuPont. Our fair value estimate would fall to $95 per share.

In an upside scenario where DuPont sees stronger volume and market share gains, we would forecast revenue to grow faster than our base case, while operating EBITDA margins expand to the high-20s. Our fair value estimate would rise to $235 per share.

We award DuPont a narrow economic moat rating from intangible assets based on the company’s patented portfolio of specialty products. The company’s success in developing innovative materials has created a group of patented products that enjoy a premium position in the market.

For example, Tyvek is the market-leading housewrap material. For these products and others, DuPont develops multiple versions for end markets, with products being used in both consumer and industrial applications. Even when a product goes off patent, the company creates new applications for that product that allow premium prices to be maintained. This ability to expand into new end markets has allowed DuPont to maintain strong profit margins on these products, even though they have been off patent for decades.

DuPont’s pricing power allows the company to fully pass along cost inflation while also maintaining prices even during an end-market demand slowdown or when input costs fall. For example, when cost inflation peaked in 2022, DuPont raised prices an average of 7% to pass along the higher costs. However, when input costs fell and volume declined in 2023, DuPont’s average prices increased 2%, demonstrating the company’s strong pricing power throughout a cycle.

We think DuPont has proved its ability to continually generate new products. This allows the company to maintain its pricing power and keeps profit margins elevated as patents expire and competitors develop generic substitutes. As a result, we are confident that DuPont will outearn its cost of capital over at least the next 10 years.

DuPont’s healthcare business should generate long-term growth from an aging Western population that requires more care, medical devices, and pharmaceuticals.

Management’s acquisitions and divestitures have created value for shareholders through favorable deals. The company’s more focused end-market exposure should result in better capital allocation and investment.

DuPont's specialty chemicals business is among the best in the world, developing products such as Tyvek that command pricing power and generate healthy profit margins.

The diversified industrials business will see increased cyclicality as construction and autos are its two key end markets. This will result in volatile profits from year to year.

DuPont is underinvesting in R&D relative to peers, which could limit its ability to create new products to gain market share over the long term or increase its reliance on acquisitions for growth.

DuPont's PFAS-related liabilities could end up costing the firm billions of dollars in lawsuits and environmental remediation, reducing shareholder value.