3 Key Trends Impacting Dow Chemicals $45 Value

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 BASF and DuPont (NYSE:DD) in the specialty chemicals segment, petrochemical firms such as Exxon Mobil (NYSE:XOM), SABIC and Sinopec for plastics and with global seed companies such as Monsanto (NYSE:MON) and DuPont (NYSE:DD) for its agricultural products. Here, we look at some key trends affecting Dow Chemicals’ equity value.

Our price estimate for Dow Chemicals stands at $45, roughly implying a 26% premium to the market price.

Global recovery in demand should boost revenues

The demand for commodity and specialty chemicals 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 Chemicals, leading to a decline in revenues of over 23%. With the global economy recovering from the recession of 2008-2009, division sales are expected to increase going forward.

Supply/Demand shifting to Asia and Middle-East

Developing markets, especially China present immense growth opportunities for specialty chemicals, 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 $124.5 billion in 2008. Additionally, 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., owing to the higher accessibility to raw materials (hydrocarbons) in this region. Recent years have seen additional investment stimulus in developing production capabilities in the Middle-East (such as the Abu Dhabi polymer park).

These regions are expected to future growth hubs for the supply and demand of commodity & specialty chemicals, and significant capacity additions would be required by the company to capture new markets in these countries.

Price uncertainty in hydrocarbon-based raw materials

Many of Dow Chemicals’ divisions rely on raw materials which are primarily hydrocarbon-based. This is especially applicable to its plastics and performance chemicals/materials businesses, which together constitute over 90% of the Trefis price estimate for Dow Chemicals. 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 surges can adversely impact both earnings for these divisions in future as costs increase.