After a solid rise of over 2x from its March 2020 lows, at the current price of $59 per share, the chemicals giant Dow Inc. stock (NYSE:DOW), appears to be fully valued. DOW stock has rallied from levels of around $26 to over $58 off the March 2020 bottom compared to the S&P which moved 76%. DOW stock has outperformed the market, due to better than estimated quarterly results on the back of better pricing for its products, especially polyethylene. Also, the stock is up 19% in the last one year despite revenue falling 10% y-o-y over the last four quarters. While the gradual opening up of the economy is expected to lead to higher demand for chemicals, the stock appears to be fully valued when compared to its historical levels, making it vulnerable to downside risk. Our dashboard Buy Or Fear Dow Inc. Stock provides the key numbers behind our thinking.
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- Revisiting Dow-DuPont Merger Motivation As The Companies Win U.S. Anti-Trust Approval
- How Will Dow’s New Texas Polyethylene Plant Help?
- 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?
The coronavirus crisis induced lockdowns affected industrial activity and hit the chemicals demand. Now that the economies have been gradually opening up, the demand for chemicals has increased, aiding Dow’s top-line growth in Q4 2020. Total revenue of $10.7 billion in Q4 2020 reflected a 5% y-o-y growth. Sales growth was aided by modest volume gains and improved polyethylene pricing, particularly in food and specialty packaging and health and hygiene applications. Overall volume growth of 1% y-o-y also resulted in volume reaching to pre-pandemic levels in all operating segments for Dow.
That said, the recent surge in Covid positive cases could prove to be an impediment in the path of Dow’s revenue growth. But in the absence of another wave and re-imposition of lockdowns, the company’s business will likely see steady growth. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.
Currently, investors seem to be buoyed by Dow’s positive revenue and earnings outlook based on the expected recovery in economic activity, and that appears to be priced in the current stock price of $59, in our view. Even if we were to look at the forward RPS estimate of $58.53 for Dow in 2021, at the current price of $59, it is trading at a little over 1.0x P/S multiple, which is higher than the levels of 0.7x seen in 2018 and 0.8x in 2019, making the stock appear vulnerable to downside risk.