Seeking Alpha
Long only, contrarian, special situations, value
Profile| Send Message|
( followers)  
Dow Chemical (NYSE:DOW) manufactures and supplies products used as raw materials in the production of customer products and services worldwide. The company offers materials for chemical mechanical planarization pads and slurries, chemical processing aids and intermediates, electronic displays, food and pharmaceutical processing and ingredients, home and personal care ingredients, hygiene and infection control, photolithography materials, printed circuit board materials, process and materials preservation, and semiconductor packaging. It also provides sticking and bonding solutions; insulation, housewrap, sealant, and adhesive products and systems; construction chemical solutions and building-integrated photovoltaics; and as well as supplies various coatings. In addition, the company offers agricultural and plant biotechnology products, pest management solutions, and healthy oils; and products used for maintaining the freshness of fruits, vegetables, and flowers.
Reasons to own DOW at $35 and change:
  • Dow Chemical sells at just 12 times this year’s expected earnings and under 10 times next year’s consensus EPS.
  • It has crushed earnings estimates the last three quarters and consensus estimates for 2011 and 2012 have moved up smartly over the last 90 days. S&P projects it will increased earnings an average of 15% annually over the next three years.
  • Dow Chemical gets 30% of its revenues from faster growing emerging markets, and almost 70% of total revenues from overseas.
  • The stock provides a generous 2.8% dividend yield, although dividend increases are on hold for the time being until DOW pays down some of the debt taken on for its Rolm & Haas acquisition in 2009. It should resume payouts once debt is more manageable. As an added kicker, once DOW pays down a high cost preferred issue, EPS should see a 30 cent a share uplift.
  • The Rohm & Haas acquisition accelerated Dow’s efforts to get into the higher margin and less cyclical specialty chemical businesses. This means that DOW should take less of a hit in the next downturn, which in time should also mean a larger multiple.
  • Dow Chemical is one of the primary beneficiaries of the expansion of gas shale exploration, as natural gas is one of those biggest costs in making many of its core products. Given the rapidly expanding reserves of natural gas and new shale discoveries, this should be a long term secular trend.
  • The company looks well on its way to achieve its goal of $4 to $4.50 a share by 2012-13. Management’s longer term goal is $7 by 2015.
  • DOW seems to have solid short term technical support in the $34 to $36 range.
[Click to enlarge]
  • Dow Chemical has pulled back by approximately 15% in the last three months on concerns of slowing worldwide growth. It might be time to start to take advantage of the selloff and build a position.
  • At $35, it is under analysts’ estimates. S&P has a price target of $44 on DOW and Credit Suisse is at $49. My own target range is 12-13 times 2012’s consensus EPS of around $3.60 or $43 to $47 a share.
Disclosure: I am long DOW.
Source: Dow Chemical Could Go 25% Higher in the Next Year