Dow Chemical Q1 2016: What To Expect

| About: Dow Chemical (DOW)

Summary

Dow Chemical is scheduled to report its first-quarter 2016 financial results on Thursday, April 28, before market open.

According to 19 analysts' average estimate, Dow is expected to post a profit of $0.83 a share, 1.2% decline from its actual earnings for the same quarter a year ago.

Dow is generating strong free cash flows and returns value to its shareholders by stock buyback and increasing dividend payments.

The average target price of the top analysts is at $52.40, up 3.2% from its April 11 close price, however, in my opinion, shares could go much higher.

Dow Chemical (NYSE:DOW) recently reiterated that its merger with DuPont (NYSE:DD) is on track to close in the fourth quarter of 2016 with more than $3 billion in synergies. According to Dow, the merger will bring opportunity to realize significant revenue synergies as complementary companies create streamlined businesses with enhanced scale and leading industry positions. Since there is very little chance that BASF will proceed with a bid for DuPont, I believe that the merger of Dow and DuPont will be put into practice in time for a significant benefit to the company due to the expected $3 billion in cost synergies. Dow also sees the completion of the Dow Corning transaction which is expected to close in the first half of 2016 as an immediate priority. Dow plans to acquire the remaining 50% of Dow Corning's Silicone's business for $4.8 billion. The transaction is expected to add more than $1 billion of EBITDA, including $400 million of synergies, and be accretive to EPS, cash flow, and free cash flow in the first year. In my view, both developments will contribute to healthy growth prospects for the company.

Dow Chemical is scheduled to report its first-quarter 2016 financial results on Thursday, April 28, before market open. According to 19 analysts' average estimate, Dow is expected to post a profit of $0.83 a share, a 1.2% decline from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $0.91 a share while the lowest is for a profit of $0.73 a share. Revenue for the first quarter is expected to decrease 13.8% year-over-year to $10.66 billion, according to 14 analysts' average estimate. There was one up revision during the last seven days and six EPS up revisions during the past 30 days. Since Dow has shown earnings per share surprise in all its last nine quarters, as shown in the table below, there is a good chance that the company will beat estimates also in the first quarter.

Source: Yahoo Finance

Since the beginning of the year, DOW's stock is down 1.4% while the S&P 500 Index has decreased 0.1%, and the Nasdaq Composite Index has lost 3.5%. Since the beginning of 2012, DOW's stock has gained 76.5%. In this period, the S&P 500 Index has increased 62.4%, and the Nasdaq Composite Index has risen 85.5%. According to TipRanks, the average target price of the top analysts is at $52.40, up 3.2% from its April 11 close price, however, in my opinion, shares could go much higher.

DOW Daily Chart

DOW Weekly Chart

Charts: TradeStation Group, Inc.

Valuation

Dow's valuation metrics are very good, the trailing P/E is very low at 8.25, and the forward P/E is also low at 13.15. Moreover, the PEG ratio is low at 1.10, and the Enterprise Value/EBITDA ratio is very low at 7.60.

In December 2015, the company raised its quarterly dividend by 9.5% to $0.46 per share, or $1.84 annually. The forward annual dividend yield is pretty high at 3.62% and the payout ratio is only 26.5%. The annual rate of dividend growth over the past three years was high at 12.4%, and over the past five years was very high at 23.4%. Dow started to raise dividends in June 2011, after decreasing its dividend payments at the beginning of 2009 due to the 2008 world economic crisis. Dow returned $2.7 billion to shareholders through paid dividends and share repurchases in the fourth quarter of 2015, with $1.5 billion related to equity redemption from the Dow Chlorine Products transaction.

DOW Dividend Chart

DOW Dividend data by YCharts

Ranking

According to Portfolio123's "ValueSheet" ranking system, DOW's stock is ranked first among all 54 Russell 1000 Basic Materials stocks.

The"ValueSheet" ranking system is quite complex, and it is taking into account many factors like; valuation ratios, growth rates, profitability ratios, financial strength, asset utilization, technical rank, industry rank, and industry leadership, as shown in Portfolio123's chart below.

Back-testing over sixteen years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.

Summary

Dow Chemical is scheduled to report its first-quarter 2016 financial results on Thursday, April 28, before market open. According to 19 analysts' average estimate, Dow is expected to post a profit of $0.83 a share, a 1.2% decline from its actual earnings for the same quarter a year ago. There was one up revision during the last seven days and six EPS up revisions during the past 30 days. Since Dow has shown earnings per share surprise in all in last nine quarters, there is a good chance that the company will beat estimates also in the first quarter. Dow is on track to close its merger with DuPont in the fourth quarter of 2016 with more than $3 billion in synergies. Dow also sees the completion of the Dow Corning transaction which is expected to close in the first half of 2016 as an immediate priority. In my view, both developments will contribute to healthy growth prospects for the company. Dow's valuation metrics are very good, the trailing P/E is very low at 8.25, and the Enterprise Value/EBITDA ratio is also very low at 7.60. Moreover, Dow is generating strong free cash flows and returns value to its shareholders by stock buyback and increasing dividend payments. The average target price of the top analysts is at $52.40, up 3.2% from its April 11 close price, however, in my opinion, shares could go much higher.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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