Dow Chemical Company‘s (NYSE:DOW) Performance Plastics division, which is worth 36% of the company’s value according to Trefis estimates, has been doing well lately. The segment saw revenue growth of 20% with an impressive 15% jump in average prices in the recently reported quarter. Prices increased in response to higher feedstock and energy costs, without having any adverse impact on volume growth. The segment is likely to get another boost as Dow has completed the construction of its Texas polyethylene plant as a part of its Gulf coast investment program to use low-cost U.S. shale gas feedstock. The plant will produce Dow’s ELITE enhanced polyethylene resins for use in packaging. The costs might be sizable in the short term, but we can expect long term margin sustenance and revenue enhancement.
Judging by the recent increase in volumes despite higher prices, there is healthy demand for performance plastics. Therefore, as the facility becomes fully operational in Q4 2017, we expect it to fulfill some of the growing demand and lead to an uptick in revenue for the company. The real benefit, however, lies in the potential of Dow Chemical’s Gulf Coast push to increase margins in the long run. The EBITDA margin of Dow’s Performance Plastics division has almost doubled to 28.8% since 2012. However, we remain conservative in our forecast and believe that Dow will be able to sustain margins of around 25% over the long run, considering strong competition. However, if Dow’s Gulf Coast expansion helps it sustain margins of around 30%, it will imply a 15% upside to our current price estimate for Dow.
- After A 2x Rally Dow Inc Stock Appears To Be Vulnerable
- Dow Chemical Benefits From Price Increases
- Revisiting Dow-DuPont Merger Motivation As The Companies Win U.S. Anti-Trust Approval
- Dow’s Impressive Earnings, Upcoming Merger Make It Interesting Going Forward
- What To Expect From Dow Chemical’s Earnings
- Why Was Dow Chemical Company’s Stock Up Last Week?
Our price estimate of $73 for Dow Chemical implies more than a 10% premium to the market.
Demand For Packaging Products Is Growing
Food packaging products constitute a majority of Dow’s Performance Plastics sales. The demand for these products is increasing because of growing food trade and increasing consumption in emerging markets, driven by a growing middle class. Apart from this, there is also growing demand for increased consumer convenience in developed markets, and ongoing efforts to reduce food waste. Dow is the world’s largest supplier of packaging materials, and continues to capitalize on the aforementioned trends. The company has a broad global footprint, which helps it meet regional demands in a cost effective manner.
How Gulf Coast Expansion Will Help
Dow Chemicals is one of the largest ethylene producers in the world, which allows it differentiated Performance Plastic manufacturing capacities with a low-cost advantage. The simplest unsaturated hydrocarbon is most commonly derived from steam cracking of either naphtha or ethane. Naphtha is derived from crude oil (naphtha constitutes around 15-30% of crude oil by weight) while ethane is the second-largest component of natural gas after methane. With the shale gas supply boost in the U.S. resulting in a cheap source of ethane, there has been a divergence in operating margins between naphtha and ethane based ethylene production plants in the U.S. Dow is therefore growing its ethylene capacity while improving feedstock flexibility of its existing ethylene production facilities to leverage the favorable feedstock scenario.
Please let us know your views by commenting in the box below.