Why DuPont electronics business Qnity has the most post-split potential

DuPont's long-awaited separation is finally upon us. The separation of DuPont's electronics division, now called Qnity Electronics, from the broader company is targeted for November 1. The duo will trade independently starting Monday, November 3. DuPont shareholders of record as of October 22 will receive Qnity shares at a rate yet to be determined. Qnity's ticker symbol will be "Q". The remaining DuPont will continue to trade under the ticker symbol "DD". For DuPont, this division will take a long time. We'll fill you in on the details of the 2017 Dow Chemical-DuPont megamerger and subsequent spin-off and fast-forward to May 2024. That's when today's DuPont announced it would split into three independent publicly traded companies in an effort to return value to shareholders. That was the initial plan. Things changed in January when management announced that DuPont would maintain its water business; This was not only to accelerate the timing of the electronics industry, but also to increase the overall attractiveness of the remaining legacy company. The end-of-water market is much more secular in nature compared to DuPont's industrial and construction markets, and those markets, along with healthcare, will make up the rest of the company. The idea behind the separation is to unlock value for shareholders. Our thesis, consistent with the view of many other analysts, is that the sum of DuPont's two parts is worth more than the entirety of its traded stock. With the split, the two new entities should trade at multiples closer to their industry peers and their combined value would be worth more than DuPont currently trades at about $76 per share on Monday, with a market cap of about $32 billion. DD YTD mountain DuPont YTD So what do you get with each of these companies? Let's start with Qnity Electronics. This is the piece of business we are most interested in from both the secular growth and upside perspective of valuation. Much of Qnity's 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's never been a more exciting time for the industry, with many forecasts expecting global semiconductor sales to surpass $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 automatic electrification and advanced driver assistance systems (ADAS). Qnity has deep relationships in the semiconductor industry; With an impressive client list that includes the world's leading manufacturers, or factories like Samsung and Taiwan Semiconductor that actually produce the chips, as well as so-called fabless semiconductor designers like Nvidia, which rely on a factory, primarily Taiwan Semi, for production. Other end markets include original equipment manufacturers (OEMs) in smart electronic devices, aerospace and automobiles. Qnity has decades-long partnerships with some of these customers and serves approximately 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 essential to ensuring the performance and reliability of today's most advanced chips and devices,” Qnity CEO Jon Kemp said at the company's Investor Day on Sept. 18. Advanced packaging and thermal solutions are integral to the development of cutting-edge chips. That's why Qnity is actually involved in the chip design process with many of its customers. This close collaboration with customers is becoming increasingly important as everyone in the value chain focuses on improving efficiency and maximizing the value of their operations. As Kemp explains, “even small gains in quality or yield can create huge value.” Geographically, Qnity generates approximately 13% of its sales from the Americas, 8% from Europe, the Middle East, and Africa (EMEA), 34% from China, and approximately 45% from the rest of Asia. The big exposure to China and Asia could create volatility in stocks when we see negative headlines about tariffs. But Qnity has developed local-to-local capabilities in China, and its deep relationships with multinationals mean that if supply chains change, its business can change with it. More than 80% of the company's production is provided from the region, and more than 70% of its raw material expenditures are purchased from the region. Let's talk about financial matters. Looking back, Qnity's net sales increased from approximately $4 billion in 2023 to an estimated $4.6 billion in 2025, while adjusted pro forma operating EBITDA margin expanded each year - from approximately 26% to approximately 30% over the same period. EBITDA refers to earnings before interest, taxes, depreciation and amortization. Looking forward, management's three-year financial targets are: an organic net sales compound annual growth rate (CAGR) of approximately 6% to 7% and an adjusted EBITDA compound annual growth rate of 7% to 9%. In short, Qnity expects to grow faster than its industry's 4% to 5% growth rate and continue to increase profitability along the way. “We expect to deliver 200 basis points of outperformance due to these underlying strong market fundamentals, with increased content, share gains and higher value mix shifting in areas such as semi-factory consumables, advanced packaging and interconnects, and thermal management,” CFO Matt Harbaugh said at Investor Day. Other financial objectives include maintaining a disciplined capital allocation strategy focused on organic growth and opportunistic mergers and acquisitions (M&A), as well as generating solid free cash flow to support a targeted net debt leverage ratio of below three times. What about valuation? Once Qnity begins trading as a standalone company, we expect it to achieve a valuation multiple above existing DuPont and closer to that of Entegris, another pure play in the electronics space. Entegris currently trades at approximately 19 times projected 2025 EBITDA on an enterprise value basis. There's another big pure electronics play, Element Solutions, and it's trading at just under 13 times EV's EBTIDA. It wouldn't be a surprise to see Qnity trade for the average of the two players coming out of the starting gate. However, we predict that it will approach Entegris over time. Qnity has industry-leading margins and has recorded better net sales growth over the last three years. We will share more details about the new DuPont and Honeywell planned Solstice Advanced Materials spinoff in the coming days. (Jim Cramer's Charitable Trust is long DD, NVDA, HON. See here for a full list of stocks.) When you subscribe 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 trading alert before buying or selling a stock in his charitable foundation's portfolio. 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