Today we're looking at two overlooked narrow-moat stocks.
DuPont DD is undervalued as investors are overly concerned about the company's long-term earnings power, elevated debt levels, and future liabilities related to the company's former PFAS operations. However, we see a bright long-term future for the company. While DuPont's transportation business has seen its profits sharply decline in the first half of 2020, we expect it will fully rebound as global auto builds recover. Longer term, we see growth coming from greater electric vehicle and hybrid adoption, as DuPont generates around 50% more revenue per vehicle on an EV or hybrid than for an internal combustion engine vehicle. We also see long-term growth in the electronics business from the adoption of 5G and in the safety and construction business from U.S. housing starts growth. Although DuPont carries elevated leverage as a result of the DowDuPont spin-off, the company should quickly improve its balance sheet health following the sale of its nutrition and biosciences business. The transaction features a $7.3 billion dividend payment to DuPont, which it will mostly use to reduce debt. Finally, we view PFAS liabilities as a minor concern for DuPont.
M&T Bank MTB is trading at one of the largest discounts to our fair value estimate within our U.S. banking coverage, and therefore we think it presents an outsize chance for excess returns as the recovery progresses. M&T Bank is a midsize bank under excellent management that has consistently prioritized shareholder returns through a combination of superior underwriting, efficient operations, and savvy acquisitions. M&T has historically been a quality company, with one of the best underwriting histories under our coverage. However, M&T is more exposed to commercial real estate than its peers. We think M&T will be able to navigate the upcoming credit losses, and once it does, we expect some of the risk premium associated with the name to dissipate. M&T is not only cheap, but it also has good management and a stable banking franchise.
Senior analysts Seth Goldstein and Eric Compton provided the research behind this segment.