Dow Chemical's Next Move

Eastman Chemical (EMN), a basic chemical company that's currently $4 off its 52-week low, trades with a forward P/E of 11, a PEG ratio of 1.8 and EV/EBITDA of 5.9.

Eastman expects earnings to more than double in the next five years, going from roughly EPS of $5 to $6 in 2008 to $10 to $11 in 2012. If that happens, Eastman should trade north of $110 by 2012 based on the above metrics.

Specialty chemical maker, Huntsman (HUN), trades with a forward P/E of 15 and an EV/EBITDA of 9.1.

Dow Chemical (DOW), the largest chemical producer in the world, trades with a forward P/E of 12.01, a PEG ratio of 2.22 and EV/EBITDA of 6.807. The company also sports a large and growing dividend of 4.9%. Dow cannot yet technically be classified as a "specialty" chemical maker until after the Rohm & Hass (ROH) deal closes and the Kuwait deal is finalized. Q4 or Q1 2009 should be the time frame for both.

Dow currently is valued in the middle of the other two, since it isn't really either at this point. Once the above deals close, Dow's valuation will move towards Huntsman's which ought to push a 30% move into the stock just based on the re-valuation.

Perhaps this what Berkshire's (BRK.a) Warren Buffett saw when he became the company's largest shareholder?

On another front, after the Rohm & Hass deal is finalized, look for Dow to begin to expand operations in India. Dow currently imports most of its products to India, but has its sights set on changing that. "The country is attractive enough to invest...it could be large," Dow Chemical International President and CEO Ramesh Ramachandran said recently. "For us, large could be billions of dollars," he said when asked to specify. "At some point we have to start manufacturing here, particularly for specialty chemicals," he finished.

Disclosure: None

Comments

[funfun:]

Isn't BASF the largest chemical enterprise in the world in revenues? Dow is second. The much shrunken and badly managed DuPont Company is used to be number one, and is now nine! ...funfun..

2008 Sep 10 07:54 AM

[Sweetness:]

Perhaps you have a detailed opinion of why you disagree with the market's valuation of DOW. However, to only state that DOW's valuation should move toward Huntsman's leads me to believe that you are using the relative valuation of HUN and EMN to determine the appropriate valuation for DOW. A dubious assumption, since DOW's market cap is 12 times greater than HUN and 7 times EMN.

2008 Sep 10 09:44 AM

[Brahm:]

It is a good time to begin moving actively on production and facilities in India. However, even with deliberate speed in mind, India is a tough place for setting up a manufacturing facility. At least five years away, and perhaps more, for chemicals production to begin if today is the start day for initiating land acquisition, plant plannning and construction. We should not underestimate the hurdles and foibles of the whole enterprise set-up process.

2008 Sep 10 10:49 AM

[Kofi Bofah:]

I think Buffett moved into chemicals believing that the price of oil was set to fall. Petroleum inputs are a large part of the cost equation for chemical companies. The fall of crude oil from $147 towards $100 will boost earnings in this sector.

2008 Sep 10 08:00 PM