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Investment Overview for The Dow Chemical Company (NYSE:DOW)
Below are the key drivers of Dow Chemical's value that present opportunities for upside or downside
Performance Plastics EBITDA margin
Performance Plastics EBITDA margin was was about 16% in 2009. Margins increased to around 19% by 2012 as a result of new product penetration, leverage on volume growth and higher prices coupled with favourable currency effects. We expect the division's EBITDA margins to grow to around 27% by the end of the Trefis forecast period. If margins increase further to around 35% by the end of our forecast period, we could see a 10% upside to our price estimate. On the other hand, if the company if the company is unable to successfully tap the feedstock advantage, margins could decline to 18%, there could be a 10% downside to our price estimate.
Agricultural Science Products Market Share
Dow Chemical's market share in the global agricultural product market has seen a considerable rise in recent years, helped by heavy investment in the division. In 2012, the market share stood at 6.6% and we expect it to increase to around 7.5% by the end of our forecast period. If, however, the investments do not yield the desired results and the market share falls to around 2.5%, we could see a downside of 10% to our price estimate. On the other hand, if the market share rises to around 12%, we could see an upside of around 10% to our price estimate.
Dow Chemical makes money by supplying high performance chemicals & materials, commodity plastics (polyethylene and polypropylene), agricultural products and key industrial chemicals to industries and consumers worldwide.
The company relies on its research & development and high-scale/low cost advantages to deliver products catered to market needs.
Dow Chemical is the world's largest producer of commodity plastics such as polyethylene. Its highly integrated operations (the company is also the world's largest ethylene producer, which is the key feedstock for manufacturing plastic polyethylene) help provide a low cost advantage for its commodity-based products. The company is also highly diversified in its performance chemicals/materials products, catering to a vast array of business sectors, including construction, packaging, consumer, institutional goods, electronics, water treatment and alternate energy.
We believe that the Performance Plastics & Materials division is the largest contributor to the firm's total value. The key factors responsible for this are -
Higher margins in the performance plastics business
The performance plastics segment has significantly higher margins than other divisions. This is primarily attributable to 2 factors: high economies of scale (Dow Chemical is the largest polyethylene producer in the world) and a high degree of backward integration (both raw materials and energy for plastics is sourced internally rather than relying on external sources). We believe these competitive advantages should be able to sustain margins in the long run.
Market share for agricultural science products business
Dow's Agricultural Science Products division contributes more than 11% to the company's total sales. Its market share in the global agricultural market was just 6% in 2009. Market share for 2011 and 2012 was buoyed with the launch of SmartStax technology which helped volumes surge. We expect the company to gain further share of the market with its Enlist corn launch as more and more herbicide tolerant crops are failing due to increased tolerance of weeds towards glyphosate-based herbicides.
Protracted global slowdown in demand could hamper growth in the short run
The demand for chemicals and materials is strongly dependent on healthy macro-economic conditions such as GDP and industrial growth. The economic recession of 2008-09 had significant adverse impacts on Dow Chemical's business, leading to a decline in revenues of over 23%. While the global economy has recovered from its low point during the recession of 2008-2009, the majority of the company's divisions, with the exception of Agricultural Products, are expected to show modest revenue growth in the short run.
Supply/demand shifting to Asia and Middle-East
Developing markets especially China, present immense growth opportunities for specialty & electronic chemicals and coatings due to the high level of industrial growth in these nations. Sales revenues of the Chinese specialty chemical market stood at $74.6 billion in 2011. In addition, multi-billion dollar stimulus packages introduced by the Chinese government for developing infrastructure should boost specialty chemical demand for construction chemicals.
Another significant development is the shift of petrochemicals supply towards the Middle East countries. This is primarily attributable to the stable and consistent supply of crude oil and petroleum in this region, which are the key raw materials for plastics and performance materials.
The Asia and Middle East regions are expected to be the future growth hubs for the supply/demand of chemicals which would require capacity additions(production, R&D and customer support centers)to sustain and grow market share in all divisions for the company.
Environmental regulations can restrict market share
In recent years, the global paints & coatings industry has seen increased monitoring from environmental agencies, primarily due to VOC (Volatile Organic Compounds) emissions which present a threat to the ozone layer. Restrictions also exist over the safety of genetically modified (GM) seeds/traits, which have to undergo a rigorous process for approval. Such regulatory actions have the potential to adversely impact both market share and margins for the company's key divisions, such as Performance Plastics & Materials and Agricultural Products.
Price uncertainty in hydrocarbon-based raw materials
Many of Dow Chemical's divisions rely on raw materials which are primarily hydrocarbon-based. This is especially applicable to the Performance Plastics & Materials and the Feedstock, Hydrocarbons and Energy division, which together constitute over 63% of the Trefis price estimate. Examples of hydrocarbon-based feedstock include ethylene, propylene and benzene. Hydrocarbon prices are highly volatile due to their dependence on various macroeconomic and political factors, and any sudden fluctuations can lead to major changes in the margins of these divisions.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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