NEW YORK (TheStreet) -- A decision by corporate raider Nelson Peltz to launch a proxy fight at DuPont E I De Nemours & Co (DD - Get Report) could boost shareholder value, but it comes with significant risk, analysts say.
As a result, investors might be wise to sit on the sidelines for the time being.
Peltz, whose Trian Fund Management LP owns about a 2.7% stake in DuPont, is battling to add his own slate of four directors to the company's board in an effort to strong-arm management into splitting the company into three different units.
Analysts say breaking up the $67 billion conglomerate could potentially unlock shareholder value that isn't currently recognized in the company's complicated structure. In fact, many believe the recent run-up in the company's stock was driven primarily by the chatter around Peltz's battle. After all, Peltz's arm-twisting had already convinced DuPont to spin off its chemicals business.
"I think [Trian's involvement] has already proven to be good for shareholders," said James M. Sheehan, an analyst at SunTrust Robinson Humphrey, noting that DuPont's shares have risen significantly since Trian first got publicly involved last year. "Much of the value creation potential that has been identified by Trian was already incorporated in the stock over the past year and there is not that much more upside for shareholders buying the stock today."
However, analysts worry that a nasty proxy fight could be time-consuming, costly and disruptive to the company's current operations. If this happens, the company's businesses -- and stock -- could suffer.
"That's a huge concern," said Sheehan.
The question then becomes whether the value created by a change in strategy will outweigh the value lost in the distraction. "The trend in the chemical industry is definitely toward more focused businesses and less toward the conglomerate structure," said Sheehan. "And shareholders generally hold the view that one management team having lots of different businesses to manage is not the most efficient way to utilize their time and resources. More focused businesses generally perform better, execute better, are more efficient and have a lower cost base."
Still, some analysts believe many of the potential benefits of a breakup are already reflected in the stock. And if Peltz's bid to splinter DuPont's seven business lines into three companies isn't successful, the stock could fall back down.
Sheehan has a 12-month price target of $60 on the stock, which is about 20% lower than its recent trading price of $73.50 a share, while UBS analyst John Roberts has a $67 price target. Both believe Peltz faces an uphill battle to convince shareholders to adopt his breakup plan.
All of this is exacerbated by market conditions. In a note, UBS's Roberts said DuPont's businesses face considerable "headwinds" in the near term due to lower grain and oil prices, foreign exchange issues, and weakening international economies -- all of which make it tough to evaluate the company's outlook and near term performance regardless of the split.
Peltz claims his break-up plan could save DuPont between $2 billion and $4 billion a year in annual costs and that the individual businesses will trade at a higher multiple as separate operations.
DuPont's management, which opposes the split, questions the validity of the cost savings projection, arguing that Peltz's plan underestimates the separation costs and loss of synergies that the conglomerate will suffer if axed into three separate units.
Nevertheless, DuPont said it will review Trian's request for four board nominees and make recommendations that are in the best interest of shareholders.
DuPont has been outperforming the broader market. In 2014, it posted total returns, including dividends, of about 17%, outpacing the S&P 500's return of 13.5%.
DuPont's shares closed trading on Friday at $73.50, off $1.03 or 1.38%, on volume of 6.9 million shares.
TheStreet Ratings team rates DU PONT (E I) DE NEMOURS as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate DU PONT (E I) DE NEMOURS (DD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, increase in net income, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
You can view the full analysis from the report here: DD Ratings Report