Dow Chemicals Coverage Launch: $45 Trefis Price Estimate
Dow Chemicals (NYSE:DOW) is a global chemical company which supplies high-performance materials, agricultural products, plastics (polyethylene and polypropylene) and industrial chemicals to industries and consumers globally. The company’s products have a vast array of applications and are used by various industries including farming, construction, transportation, electronics and consumer goods. Dow Chemicals competes with other large chemical companies such as DuPont (NYSE:DD), 3M (NYSE:MMM) and BASF. Its agricultural products also compete with global seed companies such as Monsanto (NYSE:MON).
Coverage Launch for Dow Chemicals – $45 price estimate
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We recently launched coverage on Dow Chemicals with a $45 price estimate for the company’s stock, which is roughly a 10-15% premium over its current market price.
We have broken down our analysis of Dow Chemicals into 4 divisions:
- Plastics, Hydrocarbons and Energy
- Performance Chemicals and Materials
- Health and Agriculture Products
- Basic Chemicals
Dow Chemicals is well positioned to gain in the plastics and specialty chemicals sectors. The company is the world’s largest producer of polyethylene (PE) – one of the most widely used plastics globally. Additionally, the key raw materials for plastics – ethylene and propylene – are produced and supplied internally. We expect this vertical integration in the plastics division to ensure a stable and consistent supply of feedstock, hence providing low-cost advantages in the long run.
In 2010, the performance chemicals and materials division accounted for 44% of Dow Chemicals’ global revenues and 43% of the company’s total EBITDA. The division accounts for 45% of our price estimate. With global demand recovering and increasing chemical demand from emerging markets such as China, we expect that additional capacity expansions and economies of scale advantages should lead to market share and EBITDA margin growth for this division.
Plastics, Hydrocarbons and Energy
The plastics, hydrocarbons, energy division primarily supplies the commodity plastics – polyethylene and polypropylene – to industries and consumers globally. The division also produces and supplies hydrocarbons and energy internally to the company’s other downstream businesses. In 2010, this division grew its revenue 23% and EBITDA 40%. We expect capacity expansions in Asia coupled with high levels of vertical integration to be the primary factors in market share and EBITDA margin growth in future. However, the division continues to be vulnerable to swings in hydrocarbon/petroleum prices.
Emerging Economies Drive Global Chemical Demand
Developing markets, especially China, present immense growth opportunities for specialty & electronic chemicals and coatings, mainly due to the high level of industrial growth in these nations. Sales revenues of the Chinese specialty chemical market stood at $124 billion in 2008, and this figure will continue to grow. Additionally, China has in the past earmarked certain amounts of its multi-billion dollar stimulus packages for developing infrastructure, and these policies will help boost specialty chemical demand for construction chemicals.