Jefferies on Monday upgraded Dow Chemical and DuPont to buy from hold, saying investors might be underestimating the synergy benefits from the proposed merger between the two industrial giants. "If Dow-DuPont had kept up with market multiple expansion since right before the merger was announced, the shares would trade 7%-10% higher than Friday's close," equity analyst Laurence Alexander wrote in a research note. The analyst said most macro data is similar or better than when the merger was announced in December 2015, given a potential revival in industrial manufacturing in the United States under President Donald Trump. The merger is expected to close this year. "With the merger likely to close in the near-term (90% chance, in our view), we believe Dow-DuPont will have an opportunity to show how scale creates optionality," Alexander said. Jefferies forecasts the new company, which will be called Dow-DuPont, could generate double-digit earnings growth through 2020. "Our base forecast is 19% EPS growth through 2020E, with 40% from cost synergies (no growth synergies assumed), 25% from leveraging new US Gulf Coast investments, 15% from Sadara ramping up, 10% from the ag cycle, and 10% from buybacks," Alexander wrote. Over the past 12 months, shares of Dow Chemical and DuPont are up more than 26 percent, respectively, compared with a gain of 21 percent for the S & P industrial sector and an 18 percent return for the S & P 500 index. Dow Chemical and DuPont since the merger announcement Source: FactSet Alexander writes on his investment thesis: "The investment case for DuPont is fundamentally a call on: 1) continued structural improvement in Ag, 2) validation of the industrial biotech platform, 3) successful pricing to offset raw materials, 4) successful expansion of the Nutrition platform, and 5) effective use of cash for buybacks & M & A." Jefferies has a 12-month price target of $75 on Dow Chemical, implying a gain of 18 percent from Friday's close. The target price of DuPont stands at $96, or 20 percent higher from here. Other investment firms such as Nomura have been advising clients to get behind both companies since October, as reported by CNBC PRO .
