Dow Chemical (DOW) has staged a pretty impressive recovery over the past 6 months, up over 50%. However, the stock may be getting ahead of itself. First, the current valuations seem aggressive two out of three suggest that the stock is overvalued. Second, the stock's aggressive move higher doesn't really coincide with macroeconomic conditions and management's outlook. Notably, DOW's management said in its Q4 press release said that
we will continue to closely monitor global economic trends and expect challenges in Western Europe to persist in the near term. We do not anticipate material improvements in market conditions for the first quarter of the year, but do project economic recovery will gain momentum as we move through the second quarter and the remainder of the year.
Below is an in depth look at the valuation metrics and stock chart.
Valuation: Dow Chemical's trailing 5 year valuation metrics suggest that the stock is overvalued as all of the metrics are above their respective 5 year averages. Dow Chemical's current P/B ratio is 2.3 and it has averaged 1.7 over the past 5 years with a high of 2.5 and low of 0.6. Dow Chemical's current P/S ratio is 0.7 and it has averaged 0.6 over the past 5 years with a high of 0.9 and low of 0.2. Dow Chemical's current P/E ratio is 17.4 and it has averaged 16.7 over the past 5 years with a high of 42.2 and low of 9.2.
Price Target: The consensus price target for the analysts who follow Dow Chemical is $37. That is upside of 4% from today's stock price of $35.68 and suggests that the stock is overvalued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
Forward Valuation: Dow Chemical is currently trading at about $36 a share with analysts expecting EPS of $3.38 next year, an earnings increase of 26% y/y, for a forward P/E ratio of 10.6. There are no exact comps for DOW with its size and diversity, but taking a look at other companies in the industry and similar size will give us a better idea of the stock's relative valuation. DuPont (DD) is currently trading at about $53 a share with analysts expecting EPS of $4.78 next year, an earnings increase of 12% y/y, for a forward P/E ratio of 11.1.
Siemens (SI) is currently trading at about $103 a share with analysts expecting EPS of $9.62 next year, an earnings increase of 8% y/y, for a forward P/E ratio of 10.7. Caterpillar (CAT) is currently trading at about $109 a share with analysts expecting EPS of $11.32 next year, an earnings increase of 19% y/y, for a forward P/E ratio of 9.6. The mean forward P/E of Dow Chemical's competitors is 10.5 which suggests that Dow Chemical is fairly valued relative to its publicly traded competitors.
Earnings Estimates: Dow Chemical has beat EPS estimates 2 times in the past 4 quarters. The company's EPS figures have come in between -5 cents and 15 cents from consensus estimates or about -16.7% to 22.4% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.
Price Action: Dow Chemical is down 4.7% over the past year, underperforming the S&P 500, which is up 10.1%. Looking at the technicals, the stock is currently above its 50 day moving average, which sits at $33.96 and above its 200 day moving average, which sits at $30.13.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.