Dow Inc: Solid Business, but with Fluctuating Results

Dow Inc. (DOW) is an independent firm that was spun off from its ex-parent, DowDuPont. That company was broken into three publicly traded, standalone pieces, with the previously Materials Science business evolving into the current Dow Inc.

Dow merges global breadth, asset integration and scale, focused innovation, and leading business positions to attain profitable growth. The company’s aim is to become the most innovative, customer-centric, inclusive, and sustainable materials science company.

Its portfolio of plastics, industrial intermediates, coatings, and silicones businesses offers a broad range of diversified science-based products and solutions for its customers in high-growth market divisions, such as packaging, infrastructure, mobility, and consumer care.

In my view, the company makes for decent investment in the basic materials sector, offering an above-average dividend yield which should attract income-oriented investors. That said, due to its limited growth prospects, I am neutral on the stock.

Latest Results

Dow’s latest results came in quite strong, with net sales reaching $14.8 billion, up 53% versus the year-ago period and 7% sequentially, with gains in all operating segments and regions. The impressive revenue growth was driven by favorable market dynamics, which resulted in higher basic material prices.

For instance, the company’s Packaging & Specialty Plastics segment reported net sales of $7.7 billion, up 69% year-over-year, with local prices growing 63% year-over-year due to tight supply and demand dynamics. Sales volumes also grew 5% year-over-year, as gains in energy and olefins were partly counterbalanced by lower polyethylene volumes due to weather-related supply limitations.

Consequently, the company was able to deliver GAAP EPS of $2.23, compared to $0.50 in the year-ago period.

Dividend and Valuation

Since Dow’s separate public listing, the company has been paying a quarterly dividend of $0.70, translating to a yield of 4.8% at the stock’s current levels.

With the company expected to post EPS of $8.86 for the year, the dividend appears very well-covered. That said, the company is currently enjoying a very favorable trading environment, and revenues, as well as profits, are and should be expected to decline in the coming years as the economy (likely) normalizes in the medium term.

On a similar note, the stock is trading at a P/E of 6.4 based on its current price and Fiscal Year 2021 expected EPS, which may sound quite cheap. That said, the company’s earnings can wildly fluctuate either way based on the various underlying macroeconomic variables, as seen in the company’s latest results.

Hence, investors must be mindful of the company’s valuation metrics. In any case, the company appears to be still reasonably valued, relatively speaking, for its industry.

Wall Street’s Take

Turning to Wall Street, Dow has a Strong Buy consensus rating, based on three Buys and seven Holds assigned in the past three months. At $65.44, the average Dow stock prediction suggests 14.9% upside potential.

Conclusion

In my view, Dow is a high-quality despite its short trading history in the public market, as the company was spun-off from a high-quality parent.

While the company’s current earnings are inflated and expected to decline in the coming years, I still believe the company can generate solid results going forward. Due to the risks regarding its fluctuating earnings’ nature, I am neutral on the stock, nonetheless.

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