This site requires a more recent version of Adobe Flash Player to function properly.
Go here to get Flash.
Trefis's graphical modelling tools require Flash, but here's a preview of some of the content you'll see once
Flash is enabled:
Investment Overview for The Dow Chemical Company (NYSE:DOW)
WHAT HAS CHANGED?
- Major restructurings and Dow-Dupont merger
Dow Chemical Company & Dupont announced a merger of equals in December 2015. The deal is structured as an all-stock transaction and the post-merger company will be called DowDuPont. Once the merger is completed, the combined company subsequently plans to split into three businesses, which would each be individually focused on agriculture products, materials, and specialty products. During the Q4 2015 earnings call, Dupont management expressed confidence that the merger with Dow Chemicals will be completed in the second half of 2016. The management stated that there is "very little" which would concern regulators about the two companies’ pending merger. They also stated that it was unlikely that the merger would require any significant asset sales.
The merger will be the second major restructuring for Dow within the last year, as it also spun-off a significant portion of its chlorine business for a total consideration of $5 billion. The spun off business merged with a smaller chemical company, Olin Corp., in a tax-efficient Reverse Morris Trust (RMT) transaction. The deal fell in line with Dow’s broader strategy to shift its focus away from the more commoditized chemical businesses and divert its resources towards more profitable segments.
- Consistent margin expansion
Dow Chemical's adjusted EBITDA margin improved by 164 basis points year-on-year during the first quarter. This was Dow’s 14th consecutive quarter of year-on-year adjusted EBITDA margin expansion. Some of the increase in Dow’s adjusted EBITDA during the first quarter could be attributed to higher operating leverage, or increased use of fixed assets, which results in a decrease in marginal production costs. In addition to higher operating leverage, cost savings from the ongoing 3-year, $1 billion productivity drive at the company, also boosted its profitability during the quarter. Apart from higher operating leverage and productivity cost savings, Dow’s second quarter adjusted EBITDA margin was also boosted by its increasing feedstock flexibility and higher demand for its high-value, differentiated end products.
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 stood at around 12.2% in 2009. However, the profitability of the segment has grown significantly since then, primarily on account of lower feedstock costs, enabled by a surge in natural gas production in the U.S. from shale resources. In 2015, Dow's Performance Plastics EBITDA margin stood at around 27%. Going forward, we expect the division's EBITDA margin to increase to around 28% by the end of our forecast period. However, if margins increase at a much faster pace to around 32% by the end of our forecast period, we could see a 10% upside to our price estimate. On the other hand, if the company is unable to successfully tap the feedstock advantage, margins could decline to around 24%, and there could be a 10% downside to our current price estimate for Dow.
- 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 and successful product launches. In 2015, the company's market share stood at 7% and we expect it to remain relatively stable at this level throughout our forecast period. If, however, the investments do not yield the desired results, and the market share falls to around 3.5%, there could be a downside of around 5% to our current price estimate. On the other hand, if the market share rises to around 13%, we could see an upside of around 5% to our current price estimate.
Dow Chemical makes money by supplying high performance chemicals and materials, commodity plastics (polyethylene and polypropylene), agricultural products, and key industrial chemicals to industries and consumers worldwide. The company relies on its research and 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 alternative 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 two 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 around 6.3% in 2009. Since then, the company's market share in the segment has grown to around 7% last year, primarily because of a successful launch of SmartStax seeds technology, which helped it grow sales volume significantly. Going forward, we expect Dow to gain further share of the agricultural products 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 2008-2009 had significant adverse impacts on Dow Chemical's business, leading to a decline in revenues of over 23%. While the global economy has recovered quite significantly from its low point during the recession of 2008-2009, it is still not completely out of the woods and hence a majority of Dow's divisions, with the exception of Agricultural Products, are expected to continue to face an uncertain macro environment in the short to medium term.
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 and Performance Materials divisions, which together constitute more than 60% of our current price estimate for the company. 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 therefore, any sudden fluctuations in commodity prices can lead to major changes in the operating 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
View All Help Topics