Why DuPont electronics business Qnity has the most post-split potential
DuPont’s long-awaited breakup is finally around the corner. The separation of DuPont ‘s electronics business, now called Qnity Electronics, from the broader company is targeted for Nov. 1. The two will trade independently, starting on Monday, Nov. 3. DuPont shareholders of record as of Oct. 22 will receive Qnity shares at a ratio that has yet to be determined. Qnity’s ticker symbol will be “Q.” The remaining DuPont will continue to trade under the “DD” ticker. This split is a long time coming for DuPont. We’ll save you the details around the 2017 Dow Chemical-DuPont mega merger and subsequent breakup, and fast forward to May 2024. That’s when the DuPont of today announced it will separate into three independent publicly traded companies in a move to unlock value for shareholders. That was the initial plan. Things changed in January when management announced that DuPont would retain its water business — not only to accelerate the timing of the electronics spin, but also to enhance the overall attractiveness of the remaining legacy company. The water end market is much more secular in nature compared to DuPont’s industrial and construction markets, which along with health care will make up the remaining company. The whole idea behind the breakup is to unlock value for shareholders. Our thesis, which aligns with many other analysts’ views, is that the sum of DuPont’s two parts is worth more than the stock traded as a whole. By separating, the two new entities should trade at multiples closer to their industry peers, and their combined values should be worth more than what DuPont currently trades at, which was around $76 per share on Monday for a market capitalization of about $32 billion. DD YTD mountain DuPont YTD So, what are you getting with each of these companies? Let’s start with Qnity Electronics. This is the piece of business we’re most interested in from both a secular growth and valuation upside perspective. Most of the Qnity business is focused on providing technology solutions for the semiconductor ecosystem, with more than 65% of the company’s portfolio tied directly to semiconductors. It arguably has never been a more exciting time for the industry, with many forecasts expect global semiconductor sales to exceed $1 trillion by the end of the decade, driven by growth in artificial intelligence, high performance computing, connectivity, the internet of things (IoT), and 5G mobile, as well as auto electrification and advanced driver assistance systems (ADAS). Qnity has deep relationships in the semiconductor industry, with an impressive customer list that includes the world’s leading fabricators, or fabs, like Samsung and Taiwan Semiconductor , which actually make the chips, as well as so-called fabless semiconductor designers like Nvidia , which relies a fab for manufacturing, primarily Taiwan Semi. Original equipment manufacturers (OEMs) in smart electronic devices, aerospace, and autos are among other end markets. Qnity has decades-long partnerships with some of these customers, and serves some 80% of the semiconductor market. “Whether it’s smoothing surfaces, shaping circuits, or managing heat and signal interference, we’re involved in hundreds of critical steps — each one essential to enabling the performance and reliability of today’s most advanced chips and devices,” Qnity CEO Jon Kemp explained at the company’s Investor Day back on Sept. 18. Importantly, the company’s technology, which includes materials used for the actual polishing and etching (lithography) of chips, as well as advanced packaging and thermal solutions, is integral for the development of leading-edge chips. Because of this, Qnity is actually involved in the chip design process with many of its customers. This close collaboration with customers is increasingly important nowadays, as everyone across the value chain is focused on improving efficiency and maximizing the value of their operations. As Kemp explained, “even small gains in quality or yield can create huge value.” Geographically, Qnity gets about 13% of its sales from the Americas, 8% from Europe, the Middle East, and Africa (EMEA), 34% from China, and the remaining roughly 45% from the rest of Asia. The large exposure to China and Asia could add volatility to the stock whenever we see negative headlines around tariffs. However, Qnity has built out local-for-local capabilities in China, and its deep relationship with multinational companies means that if supply chains shift, its business can shift with it. More than 80% of the company’s production is sourced in region, and more than 70% of its raw material spend is purchased in region. Let’s turn to the financials. Looking back, Qnity’s net sales have increased from roughly $4 billion in 2023 to an estimated $4.6 billion in 2025, while its adjusted pro forma operating EBITDA margin has expanded each year — from about 26% to around 30% over the same period. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Looking forward, management’s three-year financial objectives are the following: about 6% to 7% organic net sales compound annual growth rate (CAGR) and a 7% to 9% adjusted EBITDA compound annual growth rate. In short, Qnity expects to grow faster than its industry’s 4% to 5% growth rate and continue to improve profitability along the way. “With growing content, share gains and higher value mix shift across areas such as semi fab consumables, advanced packaging and interconnects, and thermal management, we expect to deliver 200 basis points of outperformance due to these underlying strong market fundamentals,” CFO Matt Harbaugh said at the Investor Day. Other financial objectives include maintaining a disciplined capital allocation strategy with a focus on organic growth and opportunistic mergers and acquisitions (M & A), as well as solid free cash flow generation to support a targeted net debt leverage ratio under three times. What about valuation? When Qnity begins trading as a standalone company, we expect it to command a valuation multiple above the current DuPont and closer to that of Entegris, another pure-play in electronics. Entegris currently trades at roughly 19 times its projected 2025 EBITDA on an enterprise-value basis. There’s one other major electronics pureplay, Element Solutions, and it trades slightly below 13 times EV to EBTIDA. It wouldn’t be a surprise to see Qnity trade at somewhat of an average of the two out of the starting gate. But over time, we envision it trading closer to Entegris. Qnity has industry-leading margins and has had better net sales growth over the past three years. In the coming days, we will share more details about the new DuPont and Honeywell ‘s planned spinoff of Solstice Advanced Materials. (Jim Cramer’s Charitable Trust is long DD, NVDA, HON. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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