Chemical Giant Dow Brews Up Growth

3/24/2014


  Recent Price
$50
  Dividend
$1.48
  Yield
3.0%
  P/E Ratio
20
  Shares (millions)
1,201
  Long-Term Debt as % of Capital
37%
  52-Week Price Range
$50.46 - $29.81

Activist investor Dan Loeb has been putting pressure on Dow Chemical ($50; DOW) to separate its petrochemical and specialty-chemical units into two separate companies. In our view, Dow has been doing pretty well as a conglomerate:

• Last year, per-share-profits jumped 30% and operating cash flow 91%. Since Dow topped December-quarter profit targets by 51%, consensus estimates for this year and next year have risen at least 2%.

• Dow reduced its total debt to $12.02 billion net of cash at the end of 2013, down 28% from $16.67 billion a year earlier.

• Operating profit margins expanded by 150 basis points (1.5%) last year, and the company projects additional gains in 2014.

• The company earned more than 560 patents in 2013, a company record.

Dow trades at 20 times trailing earnings, 14% above the average diversified-chemical company in the S&P 500 Index. But consensus estimates project per-share profits will rise 18% this year and next year, and Dow trades at a discount to peers based on cash flow. The stock is rated Buy and Long-Term Buy. 

Chemistry of success

In recent years, Dow has worked to lessen its dependence on commodity chemicals, rebalancing its portfolio to focus on higher-growth, higher-margin businesses. In particular, Dow has invested heavily in petrochemicals, and in joint ventures in high-growth foreign markets.

The company operates six main business segments: plastics (26% of 2013 sales, 47% of operating profits), performance materials (24%, 15%), petrochemicals (17%, 9%), agriculture (12%, 10%), coatings (12%, 8%), and electronic and functional materials (8%, 11%). All but agriculture delivered profit growth last year. Specialty businesses less cyclical than traditional commodity chemicals account for about 60% of Dow's revenue.

New investments should start driving revenue growth in 2015 or 2016.

• Additional petrochemical production is slated to come online in Texas and Louisiana. Revenue impact: More than $700 million annually.

• Dow expects regulators will soon approve its Enlist system of genetically modified seeds and herbicide. Revenue impact: More than $1 billion annually.

• Sadara is a joint venture between Dow and Saudi Aramco in Saudi Arabia. Revenue impact: About $500 million annually.

Going forward, Dow says it plans to share more of its profits with stockholders. In January, the company raised its quarterly dividend 16% to $0.37 per share.

Also in January, Dow tripled the size of its share-buyback program, all slated for use this year. At current prices, the $4 billion remaining on the plan would repurchase about 7% of outstanding shares — or offset most of the potential 7.7% dilution from convertible preferred shares issued in 2009. Dow can convert them to common shares starting April 1 if its common stock exceeds $53.72 per share (8% above the current price) for the better part of a month.

You can obtain an annual report for The Dow Chemical Co. at 2030 Dow Center, Midland, MI 48674, (989) 636-1000, www.dow.com.

DOW CHEMICAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '13
0.65
vs.
0.33
3%
44.99
-
38.04
21 - 18
Sep '13
0.50
vs.
0.42
1%
41.08
-
32.05
20 - 15
Jun '13
0.64
vs.
0.55
0%
36.00
-
29.81
18 - 15
Mar '13
0.69
vs.
0.61
-2%
34.83
-
30.63
18 - 16
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
57.08
2.48
0.96
44.99
-
29.81
18 - 12
2012
56.79
1.90
1.46
36.08
-
27.45
19 - 14
2011
59.99
2.54
0.80
42.23
-
20.61
17 - 8
2010
53.67
1.97
0.60
34.50
-
22.42
18 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
85
74
78
42
77
82

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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