This morning shares of agriculture, materials science and specialty products company DowDuPont (DWDP) reported a better than expected June quarter and served up an outlook for the current quarter that was also ahead of consensus forecasts. For those unfamiliar with this relatively new entity, it's the result of last year's merger between Dow Chemical and DuPont.
As with most mergers, there tends to be much synergy talk and the new company shared that so far, it's achieved roughly $900 million in cost synergies to date and boosted 2018 target by 15% to $1.4 billion and still expects to hit $3.3 billion in savings by the end of 2019. If the company can achieve that level of integration savings, it's a long-term positive for its cost structure and all things being equal means potentially greater operating leverage and EPS power over the course of the next economic cycle.
Getting back to the revenue side of things, year over year revenue jumped 17% year over year due to growth across all of its business segments. From a price vs. volume perspective, aggregate pricing rose 4% year over year while volume climbed 10% year over year with improvement across all company segments. The strongest area of growth was for its Agriculture business, which benefitted from given favorable weather compared to the March quarter. Next up was Material Science, makes chemicals used in a variety of applications ranging from cosmetics to packing materials to brake fluid, which saw its revenue climb 18% vs. the year ago quarter. The Specialty Products segment achieved 10% sales growth in the quarter with gains in most segments and all regions.
Combined with the cost synergies mentioned above, DowDuPont delivered an impressive 41% year over year increase in EPS, and again, beating expectations.
Given the company's global nature, the topic of tariff impact was one on the earnings call. DowDuPont's was prepared and shared that per its own analysis it expects "that tariffs will not have a material impact on the company in 2018" due in part to its strategy to buy locally for its various geographic businesses. Interestingly, its comment on controversial soybean exports supports something I've said with regard to Farmland Partners (FPI) that are in the Stocks Under $10 Portfolio - U.S. soybean exports that would normally go to China are simply being shifted to other countries, as reported by USDA. And with China being a net importer of ag commodities, I continue to see it being only a matter of time before those prices recover.
So, with all of this positivity, why did the shares trade off today?
Sure, some of it was due to the market sell off as trade talk once again was the topic du jour as China reiterated it would retaliate against tariffs on the news that President Trump instructed U.S. Trade Representative Lightizer to consider raising proposed tariffs on $200 billion in Chinese goods to 25% from 10%. During the earnings conference call, DowDuPont also shared that it saw higher raw material costs and investors likely focused on that. What they should have focused on was strong volume demand and how merger cost synergies were poised to mitigate if not offset raw material costs in the coming quarters. That's the math that allowed the company to guide current quarter sales to be up 10% year over year with EBITDA for the quarter up 12%.
Near-term, DowDuPont shares, like the rest of the market, will likely be trapped inside the trade and tariff conversation even as the underlying economic data inside the U.S. remains favorable. Yet at current levels, the shares are trading at discount to the S&P 500 when it's poised to deliver better EPS growth in both 2018 and 2019. That means the DowDuPont shares should at least trade in line with the market multiple if not a modest premium, which equates to a price target in the range of $75-$80. From current levels that's upside in of 13%-20%. Odds are we'll need to navigate through the trade and tariff headlines, but if President Trump can deliver and all the bluster fades, we could be off to the races with DWDP shares, especially if it delivers its cost savings targets.