As Dow Chemicals (NYSE:DOW) is scheduled to announce its Q3 financial results this week, many investors and analysts will pay special attention to the company’s progress on achieving its planned cost synergies, which will help protect its profitability even if the global economy slows further. Moreover, Dow’s business is largely driven by the demand for commodity and specialty chemicals, which are highly dependent on the health of the global economy. But despite fears of a slow down, several recent announcements have supported the outlook for Dow’s business including recent new joint-ventures in the Middle East and Asia over the last quarter. Dow competes with other global specialty and commodity chemical companies such as DuPont (NYSE:DD), BASF and 3M (NYSE:MMM).
Dow Targeting $2.5 Billion in Cost Synergies to Bolster Balance Sheet
- Dow Q2 Earnings: Higher Margins Offset Revenue Decline, Dow-Dupont Merger On Pace For Year-End Close
- Dow Q1 Earnings: Higher Margins Offset Revenue & EBITDA Decline, Management Confident Of Dow-Dupont Merger Synergies
- What Has Led To A ~9% Decrease In Dow Chemical’s Revenues In The Last Five Years?
- How Much Can Dow Chemical’s Revenues Grow Over the Next Five Years?
- How Are Dow Chemical’s Revenue & EBITDA Composition Expected To Change By 2020?
- How Has Dow Chemical’s Revenue Composition Changed In The Last Five Years?
Global economic growth is expected to be anemic in the near to medium term because of several macro-economic uncertainties. Currently, Europe is battling the debt crisis while the U.S. is blighted by high debt levels and persistently high unemployment. Meanwhile Asia is fighting inflationary pressures through monetary tightening.
In such an adverse economic scenario, Dow is continuing to focus on cost synergies to sustain its profitability amid a slow growth scenario. The company aims to save $1 billion through capital expenditures and growth spending initiatives, $750 million through cost reduction programs and another $750 million through improved efficiencies. 
We expect that these initiatives will reduce capital expenditures in the quarter and help improve the company’s profit margins in near to medium term. Dow’s strategy is to employ the cash saved into lowering its debt levels and into new partnerships that will ensure future growth.
Dow recently reiterated that its policy is focused upon lowering its corporate debt this year before focusing upon acquisitions.  This will help the company lower its interest expense in near-term.
New Joint-Ventures and Products Support Outlook
Dow has 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. In Asia, Dow expanded its partnership with Haier Group by agreeing to establish a joint R&D center in China targeted at developing solutions in home appliance and consumer electronic products. 
Its major joint venture with Saudi Arabian Oil Company (Saudi Aramco) for Sadara Chemical company that includes 26 manufacturing units, several of which constitute “mega projects” in themselves should be operational by second half of 2015 and start contributing annual revenues to the tune of $10 billion after a few years of operation. 
We believe that a focus on 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 charts above to see the impact of these trends on Dow’s stock value.
We have a price estimate of $39 on Dow Chemicals’ stock, which is more than 40% ahead of the current market price.Notes: