Dow Chemical (NYSE:DOW) manufactures plastics, chemicals, and agricultural science products to industrial clients and reaches customers around the globe. It is the world’s largest producer of polyethylene and ethylene, which is an important feedstock in the manufacturing of polyethylene. The company also deals in performance chemicals and materials as well as supplies raw materials to construction, packaging, consumer, institutional goods, electronics, water treatment and energy sectors. According to our estimates, the intrinsic value of the stock should be around $29, which is roughly 10% below the current market price.
Here is a summary of some of the business segments and key forecasts driving our price estimate for the company.
Performance Plastics and Materials
According to our estimates, the performance plastics and materials division of the company makes more than 55% of the stock price. The wide range of applications of the products of this segment from packaging adhesives, disposable diaper components, sporting goods and housewares to automotive interiors and exteriors, carpeting, home furnishings and personal care products, contribute to the huge $450 billion plus and growing market size.
Dow Chemical holds around 6% of the market share currently, which we expect the company to marginally build upon during our forecast period, primarily backed by better demand from construction and automobile sectors, planned capacity growth in the US Gulf Coast region, the capitalization of growth in demand of EPDM rubber and product innovation. The company’s EBITDA margins in the segment are expected to decline gradually to around 12% going forward, primarily due to soft pricing, weak demand and rising costs of feedstock and other raw materials.
Electronic And Functional Materials
Electronic and functional materials make up around 18% of our price estimate for the company. Products in this segment include chemicals/materials used for manufacturing flat panel displays, photovoltaics, integrated circuits (IC), pharmaceuticals and personal care products. The market size of the segment has grown at a sharp 14% annual rate for the past couple of years, and we expect it to grow at a 9% CAGR during the forecast period, mainly due to growing demand for electronic products and alternate sources of energy.
Dow’s acquisition of LED phosphor maker Lightscape Materials in May 2012, enables it to capture growth in the LED market. We expect Dow to maintain around 14% market share in the segment along with 20% EBITDA margins on the back of the growing market size and strong demand from emerging economies.
Agricultural Science Products
Agricultural science products make up around 14% of our price estimate. Products from this segment primarily include pesticides and genetically modified seeds. The industry segment has been growing at a fast pace over the past few years globally, registering strong positive growth even during the last recession, and we project this to continue to grow at a rapid pace.
Dow holds around 5% market share in the segment, and we expect its market share to increase to around 7.5% by the end of our forecast period. This is because we see a lot of growth coming from increased penetration of SmartStax, a genetically modified seed brand and other new products launched by the company in this division along with the consolidation in the proprietary seed industry.