Is Dow Chemical a Dangerous Investment?

With shares of The Dow Chemical Company (NYSE:DOW) trading at around $31.66, is DOW an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Dow Chemical provides products to customers in 160 countries. It also serves many different industries, including appliance, automotive, agricultural, and building and construction. All this diversification should mean there’s always strength somewhere. However, the stock hasn’t performed well over the past two years, and this was during a bull market. Let’s take a look at some positives and negatives for Dow Chemical prior to getting to some important numbers.

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Positives:

  • Natural gas potential could lead to increased revenue
  • Highly diversified product portfolio
  • 4.20 percent yield (higher than peers)
  • Good debt management
  • Agricultural Sciences segment recently saw double-digit increase in sales
  • Also strong performances in Performance Plastics, Coatings and Infrastructure Solutions
  • Gross margin increased from 2011 to 2012 (14.9 percent to 15.8 percent)

Negatives:

  • Strong competition
  • Heavy European exposure
  • Weak performance in Feedstocks and Energy, and Performance Materials
  • 1 percent decline in sales last quarter on a year-over-year basis
  • Earnings decline last quarter on a year-over-year basis
  • Revenue decline in 2012
  • Earnings decline in 2012
  • Decline in operating margin from 2011 to 2012 (6.7 percent to 3.3 percent)
  • Decline in ROE from 2011 to 2012 (13.3 percent to 4.8 percent)
  • Poor valuation (stock trading at 45 times earnings, industry trading at 25 times earnings)

Let’s get to some comparative numbers. The chart below compares fundamentals for Dow Chemical, Eastman Chemical Co. (NYSE:EMN), and E.I. du Pont de Nemours and Company (NYSE:DD). Dow Chemical has a market cap of $37.84 billion, Eastman Chemical has a market cap of $10.79 billion, and DuPont has a market cap of $48.65 billion.

DOW

EMN

DD

Trailing   P/E

45.23

24.12

17.79

Forward   P/E

10.92

9.90

11.98

Profit   Margin

2.08%

5.39%

7.96%

ROE

4.84%

17.98%

25.91%

Operating   Cash Flow

$4.08 Billion

$1.13 Billion

  $4.85   Billion

Dividend   Yield

4.20%

1.70%

3.50%

Short   Position

1.70%

1.80%

3.30%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for Dow Chemical is close to the industry average of 0.90.

Debt-To-Equity

Cash

Long-Term Debt

DOW

0.96

$4.17 Billion

$21.11 Billion

EMN

1.58

$249.00 Million

$4.78 Billion

DD

1.15

$4.41 Billion

$11.74 Billion

 

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T = Technicals Are Mixed

Dow Chemical has delivered a decent performance over a three-year time frame, but it has been nothing compared to peers or many other stocks throughout the broader market. The past two years have been weak, and any runs to the upside have eventually failed.

1 Month

Year-To-Date

1 Year

3 Year

DOW

-2.45%

-1.09%

-6.59%

14.81%

EMN

0.71%

4.19%

36.39%

125.20%

DD

6.60%

17.82%

3.45%

47.92%

 

At $31.66, Dow Chemical is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

31.91

100-Day   SMA

32.15

200-Day   SMA

30.93

 

E = Earnings Have Suffered a Setback              

Earnings had been improved for two consecutive years until there was a setback in 2012. The same can be said for revenue. This isn’t out of the ordinary. Many companies throughout the broader market suffered setbacks in earnings and revenue in 2012. This is especially the case for revenue. As far as peers are concerned, Eastman Chemical and DuPont both saw declines in earnings in 2012, but improvements in revenue in 2012. The numbers below are for Dow Chemical.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

57.36

44.88

53.67

59.98

56.79

Diluted   EPS ($)

0.62

0.32

1.72

2.05

0.70

 

When we look at the previous quarter on a year-over-year basis, we see a decline in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

14.10

14.72

14.51

13.64

13.92

Diluted   EPS ($)

-0.02

0.32

0.55

0.42

-0.62

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Dow is exposed to so many different industries. Therefore, slowing economic growth on a global scale has the potential to lead to some trouble.

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Conclusion

Revenue decline combined with high sensitivity to weakening economic conditions are the primary reasons Dow Chemical is a STAY AWAY. There might be some upside potential, but downside risk is substantial.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.