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Big Solutions to Improve Dow's Balance Sheet
Posted by: Victor Selva (IP Logged)
Date: April 4, 2014 05:28PM

The Dow Chemical Company (DOW) is the largest U.S. chemical maker by sales. It is engaged in manufacturing and supplying products used primarily as raw materials in the manufacture of customer products and services. The company serves the following industries: appliance; automotive; agricultural; building and construction; chemical processing; electronics; furniture; housewares; oil and gas; packaging; paints, coatings and adhesives; personal care; pharmaceutical; processed foods; pulp and paper; textile and carpet; utilities; and water treatment.

In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

Debt Repayments

Last year the company announced the final resolution of the K-Dow arbitration with Petrochemical Industries Company of Kuwait. Dow received a cash payment of $2.2 billion which reflected the full damages awarded by the International Chamber of Commerce. Dow has utilized the payment to de-leverage its balance sheet.

Cost-Saving Initiatives

The company is closing 20 manufacturing plants in Europe, North America and Latin America. Moreover, it will cut about 2,400 jobs (5% of Dow´s workforce) while continues its cost-reduction efforts under its Efficiency for Growth program initiated in 2011.

Dividend & Share Repurchases

Looking at the financials, the company has a strong balance sheet: good cash that allowed the company to announce a 28% hike in its dividend payout of $0.37 per share, reflecting a dividend yield of 2.68%, higher than the industry average. Furthermore, last year the board of directors has also started a program in February 2013, which authorized it to buy back shares worth $1.5 billion.

Analyst Recommendation

The firm is currently Zacks Rank # 2 – Buy, and it also has a longer-term recommendation of “Neutral.” For investors looking for a better Zacks Rank, there is no better option.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 13.8x, trading at a discount compared to an average of 18.2x for the industry. To use another metric, its price-to-book ratio of 2.6x indicates a premium versus the industry average of 1.57x and the price-to-sales ratio of 1.1x is above the industry average of 0.95x. Two metrics indicate that the stock is relatively overvalued.

Earnings per share (EPS) increased by 229.5% in the most recent quarter compared to the same quarter a year ago (from -$0.61 to $0.79). In the next graph we can see that it has demonstrated an interesting positive trend since last year and we include the stock price because EPS often lead the stock price movement. The last year, the stock´s share price has jumped by 51%, exceeding the S&P 500 performance.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strength within the company.

Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

DOW

The Dow Chemical Company

17.8

AKZOY

Akzo Nobel NV

-29.48

CBT

Cabot Corporation

7.84

OLN

Olin Corporation

16.22

PPG

PPG Industries, Inc

65.51

The company has a current ratio of 17.8% which is higher than the industry mean of 6.55%. Also, it's higher than the one registered by Akzo Nobel NV (AKZOY), Cabot Corporation (CBT) and Olin Corporation (OLN). For investors looking for a higher ROE, PPG Industries Inc. (PPG) could be the option.

Final Comment

As outlined in this article, good cash flows permit it to pay investors as well as de-leverage its balance sheet. Further, cost-cutting measures implemented by other chemical companies and the program designed to accelerate cost reduction actions are going to increase the bottom line.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. Gurus like Daniel Loeb (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and John Burbank (Trades, Portfolio) have also invested in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.




Guru Discussed: Daniel Loeb: Current Portfolio, Stock Picks
Joel Greenblatt: Current Portfolio, Stock Picks
Stocks Discussed: DOW, AKZOY, CBT, OLN, PPG,
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