(Dow) (Dow Inc.)
Overview of the Company - Dow Inc. is a chemical and material company providing solutions for consumer care and infrastructure.
Fundamental Analysis - Dow Inc. is in opposition to withstand inflation because of its heavy ties to commodities. It should also weather the rate hike storm as rising interest rates should dignify a strong economy where cyclicals, like DOW, will outperform.
How (DOW) Stacks Up to Competitors - I will be comparing Dow Inc to another chemical/fertilizer company, Mosaic (Mos) and a classic cyclical company, Caterpillar (Cat). Mosaic is the most profitable and has the highest return on assets, but CAT and DOW are close behind. MOS and DOW have very similar yoy revenue growth at ariudn 50%, while CAT lags at 25%. It is also notable to mention relatively higher EBITA when compared to total revenue for MOS compared to DOW and CAT. MOS also trades relatively close to book, while DOW trades at 2x and CAT about 6x. Also DOW’s high dividend of >5% makes it a little more attractive as long as interest rates stay low. If interest rates rise, that also may be a good thing for DOW as it is a cyclical company so Dow Inc may be in a win-win situation.
Bull Case - Dow Inc. is poised to benefit from rising rates but also has protection if rates stay low. The high dividend compared to competitors makes this company very attractive and will likely be seeing a rebound.
Bear Case - Dow Inc. may see some pressure as interest rates rise making their dividend less and less attractive. With such a high dividend, the company may be choking off a lot of their growth. This doesn't help their situation as they aren't the most profitable company with high enough earnings and cash flow to be giving away that much cash.
Valuation and My Price Target - Earnings forecast a slowing down of profits and it is likely that 2022 EPS will be around 7.50, roughly flat form 2021. I think that the people may be a little too low for DOW and technical analysis supports my thesis. Following a head and shoulder pattern DOW plunged to $53, roughly the same area of support where it bounced back in February (denoted by the black line on the picture). I think DOW will be back to trading around the $62 range a year from now. This indicates about a 17% return, plus the additional 5% from the dividend.
The Verdict - BUY HOLD SELL
I think a strong trend reversal combined with a good dividend spells good news for DOW. I also think the company is in a great position for the post covid economy. With projected returns of 17% plus the 5% dividend yield, DOW is currency a BUY.
*all data provided by yahoo finance and nasdaq.com