September 30, 2015 – Smartphones: Mobile Maturity

Written September 30th, 2015 by

Smartphones: Mobile Maturity

The global mobile phone installed base has decelerated sharply this decade to roughly 3% annual growth, a pace that may be sustainable for a few more years. In this context, demand for new phones is already overwhelmingly driven by replacement activity. Steady increases in Asian replacement, and an iPhone related pop in N. America, have seen phone sales rebounding recently, but we expect future global replacement rates to deteriorate particularly given the market shift toward emerging economies. The recent trend toward annual trade in plans could partly offset replacement declines in some markets, but will increase the supply of 1-2 year old used devices, threatening the trade-in economics in time. We also expect new mobile phone ASPs to tilt lower, tempering the expected 3% CAGR in units to less than 0.5% growth in industry revenues. What growth there is will come from low end smartphones, with basic feature phones falling from 34% of total unit sales to near zero by 2020. With this dynamic and a concurrent damping of product differentiation, we expect ambitious Chinese and Indian brands (Huawei, Xiaomi, Lenovo, Micromax, Spice, etc.) to benefit to the detriment of the companies that currently dominate the premium smartphone market (AAPL, Samsung, LG).

Mobile phones are a mature market. In 2012, after decades of double digit growth, the global base of mobile phones abruptly decelerated, falling sharply from 16% to 3.1% in just 4 years. With most countries already showing near ubiquitous phone ownership and less than 1% annual growth in their adult population, future installed base growth will likely have to come from the less penetrated and faster growing emerging economies in Africa and Asia. All in, we expect the total global installed base of mobile phones to grow at a slowing 3.0% CAGR through 2020.

Replacement drives phone sales. The percentage of phones sold needed to satisfy the growth of the user base has fallen precipitously over the past few years, from more than 30% in 2011 to less than 9% in 2014. As the global base appears very unlikely to reaccelerate, future demand for mobile phones will come overwhelmingly from existing users replacing their devices. Replacement rates vary wildly by region, with ~50% of North American’s upgrading their phones in a given year compared to less than 25% in Africa. Moreover, replacement rates also vary year to year with changing market conditions – North American replacement rates jumped 680bp in 2014, not coincidentally the same year as the iPhone 6 introduction. Chinese replacement bumped up 340bp in 2013 and has remained elevated since.

Used market may crowd out some replacement. The shift from carrier subsidies to installment purchase plans in the US is an obvious negative for replacement demand. To counter this, AAPL introduced its own installment plan with the twist of an annual trade-in. Carriers have mimicked this approach, leading many observers to predict further acceleration in replacement. We are skeptical. First, few consumers have opted for similar programs that have been offered. Second, the economics of a trade-in program depend on a robust market for used phones. If the trade-in plans are successful in driving replacement, they will also boost the supply of used phones, pressuring prices and destroying plan economics. Used premium smartphone sales are currently ~19% of the new device market – lower secondary market prices would also squeeze out demand at the lower end of the premium segment.

Little to no growth in new phone sales. With replacement rates in N. America, Asia and Middle East/Africa at all-time highs, it is difficult to expect the current 4%+ unit growth as sustainable. We believe that the market will settle in to 2.5-3% annual growth over the next few years, as network advances make mobile service realistic in parts of Africa and Asia and as the world adult population continues to expand ~1.25%/yr. With the market growth overwhelmingly driven by low income populations, with the pressure from the expanding used device market, and with less effective product differentiation, we anticipate global ASPs falling ~2% per year, yielding industry sales growth of ~0.5%.

Shift to smartphones and 3G/4G is still meaningful. Smartphones were about 2/3rds of mobile phones sold in 2014, a share that is rising very rapidly. With quality smartphones available below $100 and an active second hand market, we expect sales of feature phones to fall off precipitously, allowing nearly 9.3%/yr unit growth in smartphones, almost all of it coming from the low end segment. Factoring in falling ASPs tempers this to a 2.1% CAGR. Along with the shift to smartphones, the next 5 years will also see carriers phasing out 2G networks, still serving ~60% of global subs, in favor of the more spectral efficient 3G/4G standards.

Less differentiation. Smartphones are becoming more homogenous, as the factors that were once the biggest points of differentiation – e.g. screen size and resolution, processing power, camera quality, app availability, etc. – generate diminishing returns. The platforms and OEMs have strived to fill the gap with new capabilities, such as mobile payments, 3D Touch, Google Now, edge displays, etc., but it is not clear that these technologies have resonated enough with consumers to drive purchase decisions.

The rise of Chinese brands. 2015 has seen Chinese brands Huawei, Xiaomi, Lenovo and Vivo break out, consolidating domestic share and moving aggressively into international markets. With growth centered on emerging markets and value-priced smartphones, we anticipate a dramatic shift in global market share toward these vendors and away from established brands like Samsung, HTC, LG, Nokia, Blackberry and others. The Chinese may be joined by even newer Indian vendors, like Micromax and Spice, competing at even more aggressive price points.

Little growth available for AAPL. Consensus projects AAPL FY15 revenue growth of 28%, driven by the wild success of the iPhone 6. While management frames its success as share gains, the data suggests that much of this growth may have come from pulling replacement forward. N. American replacement jumped 680bp to 53.9% of the installed base in 2014, with a further increase to 54.8% estimated for 2015. After 6 months of sales, AAPL announced that 20% of its base consisted of upgraded iPhone 6s, with CIRP estimating that 40% of the US base had upgraded. These figures are far ahead of market upgrade trends, and given the preponderance of iPhones in the used market (also included in the installed base), there is likely FAR less upgrade runway than many presume. The premium smartphone market is likely nearing long term stasis, bad news for AAPL which depends upon it for growth.

Component suppliers still have room. While the maturation of the premium segment is unequivocally bad for smartphone component vendors, growth is still available in lower tiers for 3G/4G focused players. We see opportunities for SoC vendor QCOM, and sensor players like INVN and SYNA, and a broader market for GOOG’s services bundled with its Android platform.

For our full research notes, please visit our published research site.

Emerging Market Demand for Western Pharma Brands Slowing; NVS most affected, ABBV least

Written September 28th, 2015 by

Using non-G7 nations as a very rough approximation of the emerging markets, developing world demand for brand pharmaceuticals grew approximately 7.6% annually from 2004 – 2014, and is likely to slow to approximately 5.5% annually from 2014 – 2020

The traditional large caps are far more reliant on emerging market demand than either biotechs or specialty pharmaceuticals; of the large caps we believe NVS is most affected, and ABBV least affected

The non-G7 nations account for about 40% of global pharmaceutical demand, and have accounted for roughly 46% of global pharmaceutical demand growth since 2004. US net pricing gains explain most of the remainder

US net pricing gains have decelerated sharply, and further pressures are likely[1]. This, plus a slowing of developing world demand, plainly indicates that the traditional large cap pharmaceutical companies are losing what have been by far the most important drivers of revenue growth over the last decade

This strongly suggests that new product flow will be an even more important driver of performance than it has been in the past; and, that the performance gaps between companies (with and without net new product flow) will widen

[1] “Why US Brand Rx Pricing Has Stalled, and Who’s Most at Risk”, SSR Health LLC, September 8th, 2015

For our full research notes, please visit our published research site

Quick Thoughts: VZ – A Plateau Doesn’t Rise on the Other Side

Written September 18th, 2015 by


VZ CEO Lowell McAdam – “While well-positioned for the future, Verizon’s full-year 2016 earnings may plateau at 2015 levels as the company manages near-term impacts.” These words at an investors’ conference yesterday morning hit the stock 2% in trading, although it remains at a healthy 11.5x forward earnings projections that do not yet reflect the company’s expected “plateau”. Going forward, we believe that the market conditions behind VZ’s current woes – a shift in wireless buying criteria from coverage to data speeds/availability/cost, an aggressive TMUS taking subs and pressuring ARPU, a squeeze in PayTV, ongoing deterioration of the traditional wireline franchise, and the specter of future competition in broadband – will get worse rather than better. As a result, investors could see falling revenues, earnings and cash flows in 2017 and beyond, yielding future multiple contraction and threatening dividend yields. We cannot recommend holding VZ or T at this time, and greatly prefer TMUS, on which we have recently published an in depth report. (

As of yesterday, analysts were pretty bullish on Verizon. The average rating of the 33 brokers that cover it directly was solidly in Outperform territory, with only 3 assigning an Underperform or Sell rating. Expectations for 2015 forecast 3.4% sales growth, 17.6% EPS growth, and 22.4% free cash flow growth, while the consensus through 2019 projected 5 year CAGRS of 1.9% top line, 6% EPS and 5.4 for FCF. Against this outlook, VZ was trading at a near 11.5x multiple of forward earnings, buoyed by its 5% dividend yield.

However, Verizon CEO Lowell McAdam threw a bit of cold water on that optimism this morning speaking at the Goldman Sachs Communicopia Conference:

“While well-positioned for the future, Verizon’s full-year 2016 earnings may plateau at 2015 levels as the company manages near-term impacts. These impacts include the commercial model change in wireless, year-over-year wireline financial comparisons following the expected first-half 2016 sale of operations to Frontier Communications Corp., and the ramp up of new business models for wireless video and IoT.

With expectations of continued strong cash flow, Verizon reiterates its capital allocation priorities of network investment, returning value to shareholders, maintaining a strong balance sheet, and returning to the company’s pre-Vodafone-transaction credit rating profile in the 2018-2019 timeframe.”

Of course, McAdam is hoping to imply that the diminished guidance for 2016 is the result of a one-time blip, but the paradigm shifts wracking the telecommunications industry, and in particular, the duopoly of Verizon and AT&T that have ruled the wireless roost for well over a decade, seem rather more permanent than that.

Let’s consider wireless, where Verizon collects about 70% of its sales and almost all of its operating income. Within that, Verizon’s wireless services, almost 3/4ths of wireless revenues and sporting a nearly 50% operating margin, have turned down YoY in each of the past two quarters after an essentially unbroken string of growth over many years. In contrast, the sale of mobile devices, the remainder of the wireless revenues and a substantial loss maker, are up nearly 10% in the most recent quarter, due, at least in part, to higher than expected upgrade sales of the expensive iPhone 6 and 6 Plus. The change in the commercial model noted by McAdam is a shift from phone subsidies to installment sales. This may should greatly improve the economics of distributing devices, but will expose the services business to pricing pressure and higher churn as subscribers will be more free to shop for better rates. And those rates are out there. T-Mobile has led the charge in reducing rates, offering unlimited voice, text and data plans at better than 40% discounts for heavy users, combined with the numerous consumer friendly policies introduced in its “Uncarrier” initiatives.

In the past, Verizon, and its fellow duopolist AT&T, have been able to fall back on network quality to justify their ample price umbrella. By virtue of the superior spectrum granted their historical antecedents back in 1982 when the original cellular licenses were awarded, the two market leaders have been able to serve larger swaths of unbroken territory with fewer cell sites, an advantage long touted in Verizon’s “Can you hear me now?” and coverage map advertising. However, consumer perceptions of network quality are changing, with voice calling and coverage falling in importance and data availability and speed coming to the fore. As a result, T-Mobile’s strategy is working now, enabling it to harvest subscribers from below while the market leaders play defense to protect their ARPUs, a dynamic that we detailed in our recent deep dive piece (

We do not believe that Verizon’s move to mimic T-Mobile’s device financing without corresponding rate reductions and more liberal data plans can stem the tide. We do not believe that Verizon’s mobile TV aspirations will be sufficiently differentiated to make much of a difference. We expect the market for Internet-of-things (IoT) connectivity will be very price sensitive and competitive. In short, we see Verizon’s 2016 plateau as the inflection point for a long, slow and inevitable deterioration in the company’s core wireless business and a consequent deterioration in the company’s cash flows and, thus, dividends.

For our full research notes, please visit our published research site.

SSR Health New Product Approval Portfolios & Supporting Data Update

Written September 16th, 2015 by

Drug, biotech, and research-based spec pharma stocks tend to outperform their peers in the year or so before regulatory actions (‘PDUFA’ dates) on major new products, with a large portion of total risks being concentrated in the days immediately preceding and following the PDUFA date

Since November of 2011 we’ve run model portfolios consisting solely of names with pending (i.e. ‘pre-PDUFA’) or recent (i.e. ‘post-PDUFA) major-product regulatory actions, respectively. Within each broader ‘pre-‘ and ‘post-PDUFA’ portfolio are three sub-portfolios that differ only in terms of how large the new product is as a percentage of the company’s total sales forecast. E.g. the ‘1% pre-PDUFA’ portfolio consists of all names with pending regulatory decisions on products that account for at least 1% of the company’s total sales forecast, and so on for the ‘5%’ and ‘20%’ pre- and post-PDUFA portfolios. To moderate risks, all portfolios follow rules to limit long positions in the days immediately before and after regulatory actions

Since inception the 1% pre-PDUFA portfolio has produced greater annualized returns (57% v. 35%) with a lower standard deviation of annual returns (13% v. 15%) than an ‘innovator index’ of nearly the entire universe of biopharmaceutical stocks. The 5% and 20% pre-PDUFA portfolios have outperformed by even greater margins as compared to the innovator index (77% and 91% v. 35%), though at higher s.d. of returns (24% and 47% v. 15%)

US real pricing power for pharmaceuticals is waning, increasing the importance of new product flow to relative performance. Thus screening for names with attractively priced new product flow is an appropriate first step to stock selection across the drug, biotech, and spec pharma sub-sectors. We offer two related tools, the first being these portfolios of names with major pending or recent regulatory actions (published bi-monthly); the second being our Hidden Pipeline series of reports that identify undervalued phase 2 and earlier pipelines (published quarterly)

For our full research notes, please visit our published research site

Why US Brand Rx Pricing Has Stalled, and Who’s Most at Risk

Written September 8th, 2015 by

Despite continued rapid list-price inflation, on a sales-weighted basis, net (after all rebates and discounts) pricing for US prescription brands grew just 0.7% in 2Q15, as compared to 4.4% in the year prior quarter

Net price declines in 4 major categories (rapid-acting and mix insulins, long-acting insulins, COPD combos, and HCV) explain the vast majority of the slowdown. All 4 instances are the result of a shift in formulary management; specifically formulary managers’ (and their plan sponsors’) newfound willingness to exclude major brands (and even category leaders) from formulary, rather than simply relegating these to higher, less-preferred tiers

This more aggressive approach to formulary management will likely spread to other drug categories. We believe major brand exclusions and associated net pricing declines are highly likely in the erectile dysfunction (ED), multiple sclerosis (MS), and GLP-1 categories. And, we believe brand exclusions and net pricing erosion is reasonably likely in both the oral anticoagulant and irritable bowel disease (IBD) categories

For the large cap pharmaceutical companies, US net pricing gains account for roughly 46% of total WW revenue growth over the past 3 years; as such threats to US pricing power are very potent threats to global revenue and earnings prospects. Among the large caps we anticipate US pricing weakness for ABBV, AZN, Bayer, GSK, LLY, MRK, PFE, and SNY. Conversely we see relatively strong US pricing outlooks for BMY, JNJ, NVS, and Roche

For our full research notes, please visit our published research site

August 24, 2015 – Quick Thoughts: Move Along Citizens, Nothing to See Here

Written August 24th, 2015 by

Quick Thoughts: Move Along Citizens, Nothing to See Here

The traffic back from the Hamptons may have set a record Monday morning as the Dow opened down a shocking 1000 points on general squeamishiness catalyzed by another sharp drop in Chinese stocks overnight. TMT stocks, seen as risky with their high multiples and high betas, have taken a beating over the past week, capped by the Monday rout. NFLX, hailed as a conquering hero on its 2Q earnings and environment, is off 12.3% vs. last week. AMZN, crushing it in both bellwether retails sales and in its recently broken out AWS business, is down 11.2%. GOOG is off10.3% despite solid numbers and a shareholder friendly restructuring announcement. MSFT may have seen its cloud revenues up 98% in 2Q, but its stock has declined 10.1%. AAPL? Down 9.3%.

With the strong performance of the TMT leaders prior to this recent slide and with the loft valuations accorded in private financings for companies like Uber and Snapchat, there has been chatter amongst pundits and value focused investors of a new tech bubble, a perspective that may have stoked the relatively strong downdraft amongst the tech stocks. Having been followed the networking sector through their rise and calamitous fall at the turn of the millennium, we don’t see it this time. Most of the highflyers brought to earth during this recent shock are robust businesses with long visibility to years of growth and to growing profitability. Indeed, we believe that some of these businesses could prove significantly MORE resilient to a global recession than the broader market.

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The Day the Bundle Died

Written August 13th, 2015 by

The Day the Bundle Died (Excerpt from August 12, 2015 – Video Media: The Cord Cutting Myth Gets Real)

One by one, media company CEOs have put a brave face on the state of the cable bundle despite the ample evidence of its deterioration. The shrinking number of pay TV subscriptions? “A slow leak that is unlikely to accelerate.” Falling ratings? “Nielson is not counting all of the viewers watching on a time shifted basis.” Weak upfront ad sales? “Ad buyers are simply choosing to hold back their decisions until much closer to the air date.” Ad revenues down year over year? “To be expected after the mid-term election spending in 2014.” Pay no attention to the man behind the curtain – the cable bundle is wise, powerful and eternal!

Or not. Media investors have awoken from a five year coma to discover that cord cutting is real after all. DIS CEO Bob Iger’s admission that even mighty ESPN was facing falling subscriber counts and soft ad sales shook them into a panic. The next day – a Black Tuesday for US media stocks – DIS, CBS, FOX, TWX, CMCSA, VIA, DISCA, and SNI dropped an average of 8.2%. After Wednesday, these 8 companies had shed a collective $46.2B in market cap. Ouch.

Separating out CMCSA and its massive cable system business, the remaining 7 media giants trade at a collective cap weighted P/E of 17.9, still suggesting better than market cash flow growth and ahead of their long term average. Consensus analyst expectations still suggest 4.7% sales growth over the next 5 years, perhaps due for some significant revisions.

Meanwhile, nearly a month prior NFLX CEO Reed Hastings laid out the picture from the opposite angle. Subscriptions were up 17% to 42M in the US, with domestic viewing hours up 40%. Assuming 1.5 viewers per stream, Netflix’s average audience is now bigger than any US network, cable or broadcast, and growing. Around the same time, Susan Wojcicki, head of GOOG’s YouTube business, shared some similarly impressive numbers. YouTube monthly viewership is up 40% YoY, and the total watch time is up 60%, the fastest growth in more than 2 years, to more than 10B hours per month. Mobile, which now accounts for more than half of those viewing, had a 100% jump in ad revenues YoY.

The TV industry’s response has been cautious, licensing live feeds to DISH, SONY and, likely, AAPL for skinny bundle OTT services, but refusing to allow cloud-based DVR functionality. Trends suggest that online linear TV may prove less than popular. Hub Entertainment Research recently reported that 53% of all US video viewing is time-shifted – DVR, on-demand, or streaming – with millennials even less likely to watch linear TV. TWX and CBS have jumped in with on-demand streaming versions of their premium channels, but at price points too high to encourage cord cutting.

We believe network TV is at the beginning of a long squeeze between weakening fees and ad sales on one side and rising content costs on the other. Streaming rivals will have increasingly larger scale, better data, and deeper pockets to buy more of the best content, including the life blood of linear TV – live sports. We acknowledge that the exodus that has begun will take many years to complete, but it is, nonetheless, inevitable. Media players that are diversified away from the cable bundle, e.g. DIS, or already moving to solidify their bona fides as streamers, e.g. TWX, may fare better than others, but all will suffer. Meanwhile, NFLX and GOOG should continue to reap the rewards of their dominance for online video. AMZN and FB have intriguing opportunities in what should be a huge market, but neither is likely to challenge for leadership. We also note that ad hoc live streaming, pioneered by TWTR’s Periscope and the startup Meerkat, is an intriguing extension to the YouTube paradigm and could be the “next big thing” in video.

For our full research notes, please visit our published research site.

August 12, 2015 – Video Media: The Cord Cutting Myth Gets Real

Written August 12th, 2015 by

Video Media – The Cord Cutting Myth Gets Real

The death of the multichannel cable bundle will take years to play out, but investors were reminded of its inevitability by the signs of erosion from even the best regarded media players. TV viewing is in decline. Pay TV subscriptions are falling. TV ad sales are down. Meanwhile, viewership is booming for NFLX and GOOG’s YouTube, as Americans are expressing a strong and growing preference for streaming on-demand video. The TV nets are coming late to the game, licensing linear streams to OTT players, like DISH, SONY and likely AAPL, offering skinny bundles online. We believe that the OTT bundles are unlikely to stem the tide toward on-demand streaming, damaging traditional media brands, and leaving them at a growing scale and data disadvantage in competing for creative content. Rising programming costs, particularly for live sports, will squeeze networks simultaneously suffering from top-line erosion. NFLX is the clear winner in subscription on-demand streaming, likely to continue its explosive sub growth with significant future monetization options. AMZN is best positioned to be number 2, ahead of TWX and its overpriced HBO Go. YouTube dominates the similarly fast growing ad driven, short-form video paradigm that it pioneered. We do not see FB as a threat to YouTube’s primary use cases, although its newsfeed has proven a robust channel for auto-play video ads.

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Quick Thoughts: Google’s New ABCs

Written August 10th, 2015 by

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Quick Thoughts: Google’s New ABCs

The announcement that Google would reorganize itself and take the name Alphabet had the ring of one of the company’s infamous April Fool’s pranks, posted to the same company blog used for the annual tomfoolery. The name itself is whimsical, and if this announcement had been made a few months earlier, it would have been hard not to take it as an elaborate joke – think of Larry and Sergey jumping in front of Apple in alphabetical order, just as Steve Jobs once picked the name Apple because it preceded his former employer Atari in the phone book. The move to add a layer of management and take a conglomerate style structure runs counter to the trend toward spinouts in the world of TMT.

Still, despite the whimsy and surprise, this creative move makes sense. It is a signal that the company is willing to accept more accountability for its investments, which will be easier for investors to evaluate extracted from the core business. This change also gives those investments more attention from management, perhaps encouraging more a more aggressive agenda of investing in long term winners while culling ideas that don’t pan out more quickly. Businesses like Nest, Fiber, Project Fi, autonomous vehicles, robotics, Calico and others could benefit from a bit more light and visibility.

The move also opens more C level jobs for the company’s deep bench of executives, many regular targets of recruiters looking to fill CEO slots elsewhere. In particular, it elevates highly regarded Sundar Pichai to the top slot at Google, putting the operating responsibility for Alphabet’s revenue and profit engine in the right hands, leaving co-founders Page and Brin to strategic positions at the top of the holding company. Core Google has many promising opportunities on its plate, and Pichai can pursue them aggressively without the distraction of moonshots. This is a good thing for the company and for investors.

Meanwhile, this move leaves Alphabet better able to pursue value-added acquisitions while it works to resolve antitrust charges from the European Union. Twitter, EBay, Spotify, and even Tesla become realistic possibilities under this structure. Imaging Elon Musk as CEO of a wholly owned Alphabet subsidiary with responsibility for the further development of autonomous vehicle technology. In the current environment, such moves would have been unthinkable if tied directly to Google’s core search business.

Investors apparently agree with my optimistic take on Alphabet, taking GOOG stock up 5% after hours once the blog post hit. The 2Q15 results, showing new discipline on expense controls and strong growth from the core business, assuaged a number of market concerns. This reorganization could provide the energy to keep the trajectory moving up and to the right.

For our full research notes, please visit our published research site.

DuPont – Investor Exodus

Written July 29th, 2015 by

DuPont management may still have the faith that the science based strategy is right, but everyone else seems to disagree.  Trian criticized the company for bloated costs and lack of returns on its R&D spend and we have echoed that in research both before and after the Trian involvement.

The bear case is winning today and it goes as follows: DuPont management takes the proxy win as an endorsement of the strategy and the path the company has followed for the last decade.  The company continues to waste money on ineffective R&D, continues to ignore its high cost base and possibly makes further bolt on acquisitions which disappoint and destroy value.  On this basis you would expect low earnings growth and a continuation of the recent history of negative guidance following too bullish expectations based on optimism around the R&D return and the value of novel products.  On this basis the stock at best moves sideways.

This is perhaps one of the least sophisticated analyses you will see from our group, but it illustrates a point.  In the exhibit below we show the cumulative spend on R&D for the last 20 years, divided by 2014 revenues.  The R&D spend at DuPont over the last 20 years is equivalent to almost 90% of the 2014 revenue level – overshadowing everyone else on the list with 20 year history.  Obviously we are not taking into account portfolio changes, but if you then compare this data with average 20 year TSR, you can see the disconnect.

DuPont will argue that the past is not a good predictor of the future, but we, and clearly many investors, believe that it is.


The bull case is that all this could be fixed and that billions of dollars of value could be unlocked.  We would contend the following:

  • There is at least $3.0 billion of costs that could be cut out of DD without breaking up the company – the number would most likely be higher with a break-up
    • $3bn of costs – if all taken to the bottom line – would be worth $2.40 per share
  • At least $0.75bn of R&D could be abandoned with no impact on earnings
    • 35% of R&D – $0.60 per share
  • The balance of the R&D spend could be managed more effectively to generate a better return
  • Free cash can be deployed in share buyback and the company could buy back as much as 12% of the stock over the next two years including the one-time cash dividend from Chemours
  • Adding this all up gives a conservative $7.00-7.50 per share earnings number in 2018 versus current consensus of $4.50

Perhaps it would take more than 3 years to pull out all of the costs, but the opportunity is clear and this is what Trian was looking for and where the target price north of $100 per share came from.

Those selling the stock today are either convinced that the activists are not willing to have another go and/or that the DuPont board is willing to sit back and hope that a flawed strategy to date can suddenly come right.  We think neither conclusion is right. The bull case is much more believable

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