Dow Chemicals Slumps on Macro Concerns but Fundamentals Intact

Since the beginning of August, Dow Chemicals (NYSE:DOW) stock has slumped almost 30%, and with the absence of any negative news flow from the company during this period, we believe that a broader equity market sell-off due to sliding global investor confidence is the main culprit. Such macro concerns are justified if an ultimate downturn in business, or a nasty recession, sets in and weakens demand for Dow’s products. Dow competes with other global specialty and commodity chemical companies such as DuPont (NYSE:DD), BASF and 3M (NYSE:MMM).

We have a price estimate of $39 on Dow Chemicals’ stock, which is well ahead of the current market price.

Sliding Investor Confidence Drags on Shares

State Street Investor Confidence Index measures investors “attitude” toward to risk and indicates global investor confidence stood near its 12-month low at 89.6 points in August 2011, a massive drop of 12.9 points from 102.5 points in July. North America witnessed the largest drop of 13.9 points in investor confidence in August.

The Center for European Economic Research reported that German investor confidence has also plummeted dramatically to its 2 1/2 year low in September because of ongoing European debt crises. ^[1] The primary cause for the declining investor confidence is deteriorating global economic environment due to worsening European sovereign debt crisis, rising concerns over U.S. economic growth and inflationary pressures in many developing economies. We expect that investor confidence will remain low until market concerns subside, causing increased volatility in stock prices in the near term.

Joint Ventures and Debt Reduction in Focus

Dow recently reiterated that its policy is focused upon lowering its corporate debt this year before focusing upon acquisitions. ^[2] The company has been selling its assets for last two years, such as its recent sale of global polypropylene business which is expected to close by the end of third quarter. ^[3]

The company has also been favoring joint-ventures and more-profitable chemical products to cut risks and costs. In the third quarter Dow announced four new joint-ventures ranging from manufacturing electrolytes for lithium-ion batteries in energy storage applications to producing biopolymers made from renewable, sugarcane-derived ethanol in Brazil. It also converted one of its wholly-owned business into a joint-venture by selling 50% stake to Mitsui & Co.

Its major joint venture with Saudi Arabian Oil Company (Saudi Aramco) to build and operate a world-scale, fully integrated chemicals complex in Kingdom of Saudi Arabia is expected to be operational by second half of 2015 and is expected to start contributing annual revenues to the tune of $10 billion after a few years of operation. ^[4]

We believe that focus upon more-profitable chemical products will help the company grow its market share of Performance Chemicals & Materials in mid-long term.

You can drag the trend lines in the  modifiable chart above to see the impact of these trends on Dow’s stock value.

See our full analysis for Dow Chemicals’ Stock

1. Center for European Economic Research: ZEW Indicator of Economic Sentiment – Expectations Continue to Decline [↩]
2. Reuters: Dow Chemical to look for deals next year [↩]
3. Dow Announces Sale of Global Polypropylene Business to Braskem for $340 Million [↩]
4. Dow: Dow and Saudi Aramco Announce Joint Venture to Drive Downstream Growth through World-Scale Chemicals Project [↩]