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Gurus Dumped Dow in 2013 - Is 2014 the Year for Buying?

March 12, 2014 | About:

Joel Greenblatt (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Steven Cohen (Trades, Portfolio), John Burbank (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), T Bone Pickens, Caxton Associates (Trades, Portfolio) and Manning & Napier Advisors have dropped The Dow Chemical Company (DOW) throughout 2013. However, Dow’s overall performance continues to confirm a strong business model based on research and innovation.

In that line, news has surfaced about the company’s new R&D facility in Houston where 2,000 employees will focus on product innovation. Some employees will begin working out of the campus starting next year and the facility is scheduled for completion by the end of 2016, said Trish Thompson, a Dow spokeswoman.

Collecting Winnings for Dumping

In the last quarter of 2013, gurus seem to have changed their opinion about Dow’s future performance. The high dumping rate registered between January and September stopped there. Moreover, major shareholders sold enough stock to collect their corresponding winnings and kept most of the stake in the company. Also, new positions were consolidated in December and other holdings have seen considerable increments.

By the end of February, stock price recovered the ground lost in the first half of January, and continues on an uptrend. Trading at 14.3 times its trailing earnings, the stock carries a 15% discount to the industry average. Additionally, the latest indicated quarterly dividend payment has ranged from 2.60% to 3.0%.

The indicators evince what management expects from future overall performance, hinted by the swing to a profit in the fourth quarter of 2013 on continued strength across the agriculture, coatings and plastics businesses, along with healthy gains from emerging markets.

What to Expect

The business model employed by Dow is characterized by acquisitions and partnerships. With regard to the first, the acquisition of Rohm & Haas turned the company into the world’s leading specialty chemicals and advanced materials company by broadening its product range in paints, coatings and electronic materials. On the other hand, Dow AgroSciences signed an agreement with Monsanto to develop the next generation of advanced weed and insect control technology in corn.

The return to profit at the end of 2013 is not accidental. Dow’s management has made public intentions for adjusting capacity in Europe, North and Latin America. Additionally, the “Efficiency for Growth” policy continues in place as support for the “Global Business Unit” model. Moreover, the firm has divested those underperforming assets that are exposed to raw material price fluctuations. The move will help to shield performance and profitability from sudden market swings.

The “Global Business Unit” is a key to profitability since two-thirds of income is raised outside the U.S. Growth in emerging economies. In line with this reality, the firm is building an integrated manufacturing facility for Performance Products, Plastics and Performance Systems businesses with Saudi Aramco. The presence in the Middle East, at a safe and stable country, allows the company to increase presence and access to Eastern markets.

Innovation Takes Time, and Profits Too

Dow, in comparison to other competitors, has a remarkable feedstock flexibility, expected to improve when ridding itself of underperforming assets exposed to raw material price fluctuations. Additionally, the current business adjustments have impacted overall performance, returning the company to profits. Most importantly, the latest acquisition gave the firm a leading position in a second segment, strengthening overall market positioning.

The key to growth for Dow however, is R&D. Hence, the shared project with Monsanto is set to land another landmark for the company. The introduction of pest-resistant corn has the potential to be a game changer, and a strong partner for the water efficient corn recently introduced.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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