Qnity Electronics

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 raised our Qnity fair value estimate to $150 from $140 following the company's second-quarter earnings. The increase is driven by higher near-term revenue growth in both segments and increased profit margin assumptions in the interconnect solutions segment. We assume a weighted average cost of capital of around 9% for Qnity.

Over the long term, we forecast high-single-digit annual revenue growth. We think global semiconductor volumes will grow at an average annual rate in the midsingle digits. We forecast Qnity’s new specialty materials to see volume growth above semiconductor chip production as Qnity wins business in more advanced nodes at a mid- to high-single-digit rate. In interconnect solutions, we expect Qnity to benefit from data center buildouts, as data centers require its connectivity materials and solutions. We forecast Qnity will see operating EBITDA margin expansion from 29.5% in 2025 to around 34% by the end of our five-year forecast. This is driven by more products being used in advanced chips and higher volumes.

To develop new products, we expect Qnity to reinvest roughly 7% of sales in research and development, which is in line with its investment rate over the past several years. We forecast capital expenditures will average 6% of sales, higher than in recent years, as the company invests in long-term growth.

Our base case assumes that Qnity pays a total of $210 million 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 serve the majority of the US population, and the $875 million settlement to the State of New Jersey. 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 Qnity, today's DuPont, 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 Qnity, DuPont, and Corteva will pay a combined $2 billion over the next 20 years under their agreement with Chemours. Based on the Qnity, DuPont, 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 pays 29%. This results in around $210 million in total litigation for DuPont.

In a downside scenario in which Qnity experiences a prolonged volume decline due to an economic slowdown, we would forecast revenue to grow at a mid-single-digit annual rate, well below our base case. We also assume operating EBITDA profit margins average in the high-20% range, below our mid-30% midcycle assumption. Finally, this scenario assumes Qnity’s PFAS-related liabilities soar to around $2.1 billion as Chemours is unable to pay the escalating liabilities and files for bankruptcy, resulting in 32% of liabilities being transferred to Qnity. In this scenario, our fair value estimate would fall to $90.

In an upside scenario, we assume semiconductor growth accelerates, and Qnity wins market share in new chips. We forecast revenue would grow at around 12.5% per year and margins expand above our base-case scenario. In this scenario, our fair value estimate would rise to $210.

We assign Qnity a Morningstar Economic Moat Rating of narrow, based on intangible assets from the company’s proprietary formulations that are tailored to its customers.

In semiconductor technologies, Qnity’s moat comes from its ability to help its customers make smaller, more-powerful chips, with new materials and the ability to provide greater levels of purity for materials and the fab environment. As semiconductors get smaller, these newer, advanced chips have more-intricate circuitry, or a denser arrangement, which requires more production steps and leads to the need for more-advanced chemicals. Qnity makes chemicals used in key, high-value manufacturing steps throughout the fab process, including photolithography, chemical mechanical planarization, etching, cleaning, and packaging.

Qnity’s products allow smaller, more-powerful chips to be manufactured at targeted yields at least in the mid-90%, which is the percentage of semiconductors that successfully pass inspection. Semiconductor fabricators prepare to manufacture smaller, more-powerful chips years in advance. Qnity will work closely with semiconductor fabricators to develop proprietary, customized solutions that remain Qnity's intellectual property. This establishes valuable intangible assets that allow Qnity to generate economic profit over the lifecycle of the products in which its proprietary formulations are used. In 2024, roughly 35% of sales were to advanced chips. We expect this to grow to 45%-50% by the end of the decade.

Intangible assets are also supported by Qnity's status as a preferred supplier. Semiconductor fabricators use preferred suppliers for their chemicals and will typically choose from just two to four companies to bid on a chemical for a new node. Suppliers not on the preferred list usually do not have the opportunity to bid for its business.

In interconnect solutions, intangible assets come from Qnity’s differentiated advanced packaging and thermal management products. Advanced packaging is a crucial step that enables printed circuit boards to shrink over time, allowing more components to be packed into a smaller space and enabling higher-performing electronic devices. Thermal management and electromagnetic interference shielding materials are also increasingly important to ensure consistent signals and connectivity in electronic devices, such as smartphones, or in data centers, where the ability for materials to prevent component failure is crucial.

Qnity boasts an attractive portfolio of market leading, differentiated products required for advanced semiconductor fabrication and interconnected devices. When we look at the company as a whole, we are confident that positive economic profits will prove durable for at least the next 10 years.

Qnity will benefit from the growing demand for semiconductors, as more are needed in electronics and transportation, and to enable artificial intelligence.

Qnity is well-positioned to grow above semiconductor demand as its specialty chemicals and materials are required at higher volumes in more-advanced chips.

Qnity’s interconnect solutions business will grow from data center buildouts, as these will require premium thermal management materials.

New artificial intelligence models will require less computing power over time, which will to slower semiconductor growth.

Quantum computing may disrupt the semiconductor industry, which would hurt Qnity and its main customers.

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