Analysis: DWDP DOW

On Tuesday before the open, DowDuPont (DWDP) completed the highly anticipated separation of Dow Inc (DOW) . We are providing this update as members who own DWDP shares will notice that a) DWDP shares will be trading markedly lower than where it closed on Monday (from $54.42), and b) you will now own shares of Dow Inc.

DOW's first official day of trading will be today, April 2nd. We will be updating the AAP website accordingly (adjusting DWDP cost basis and adding DOW shares to the portfolio), but the transaction takes some time to flow through on the back end. We are working to do so as early as possible this morning, technology permitting, and we will keep subscribers updated on when the changes are live. In the meantime, we wanted to provide additional details on the spin and how the move impacts shareholders.

Before we dig deeper, you can refer back to yesterday's note here, where we discussed Dow Inc at length.

Please note that as a result of the separation, DWDP shares will trade lower than its Monday closing price. Do not be alarmed: this is expected, as DWDP shareholders are compensated via the new ownership of DOW shares.

As we have explained previously, this corporate action was a 1 for 3 spinoff, meaning that for every 900 shares of DWDP owned, the entitlement in Dow Inc will be approximately 300 shares (900 DWDP * terms (1/3) = 300 DOW shares). Using AAP as an example, we will be entitled to 458 shares of Dow Inc (1,375 shares * terms, with fractional shares rounded down) and will continue to own 1,375 shares of DWDP. Furthermore, this transaction qualified as tax-free, meaning that a percentage of our cost basis in DowDuPont will be allocated into Dow Inc without a realization of capital gains/loss. We will be following up on this note later with additional details (cost basis for each name) but wanted to remind members of the dynamics of the trade.

We will be initiating Dow with a $62 price target to start, reflecting roughly 12x consensus 2019 earnings per share. Although we are watching the trading in the name initially, we rate the stock a ONE given the de-risked nature of last week's preannouncement and the stock's impressive return on capital policy.

As we explained in our previous commentary, we plan to hold onto DOW shares for now as we expect its value as a standalone entity will be favorable compared to its worth as part of a whole with DowDuPont. Furthermore, we are encouraged with management's strong commitment to shareholder returns, evidenced by the dividend yield north of 5% and the launch of a $3 billion share repurchase program.

We will also adjust our DWDP price target to $45 and maintain our TWO rating. This change in price target is simply a reflection of the drop in value from Dow, with a little added multiple compression due to the recent downside guidance update in the Agriculture business. While we remain positive on the value creation behind the breakup, we still have some lingering concerns around possible business disruptions due to the severe flooding in the Midwest. From a technical perspective, Dow Inc has now replaced DowDuPont in the Dow Jones Industrial Average and we would not be surprised to see a short period of outflows related to this change as well. That being said, we still find intrigue in the Specialty Products business, the segment whose first quarter expectations remained in-line with guidance, due to the likelihood of additional value creation events through portfolio restructuring/divestments.