News Column

Transformation of Dow Chemical

August 18, 2014



Dow Chemical benefits from twin global macro trends, the accelerating growth in the US economy and the fracking related falls in natural gas, ethane and propane prices used as feedstocks for its cast petrochemicals businesses.



Hedge fund manager Dan Loeb is a shareholder activist legend on Wall Street, in the same league as Uncle Carl and Bill Ackman (Mr Short Herbalife!). So when Loeb's Third Point fund accumulated a $1.3 billion stake in Dow Chemical and criticised CEO Andrew Liveris for a decade of operating underperformance relative to Lyondell or DuPont, a overnight strategy/culture change that would rock the stock price was inevitable. And, lo and behold, Dow Chemical shares rose almost 45 per cent in the past year as Liveris declared that "there are no sacred cows here" (code for divesting $6 billion low-margin coating businesses) and an "unrelenting focus" on shareholder returns (code for $4 billion in buybacks and $1.8 billion in dividends). Hallelujah, its raining cash in Midland, Michigan! Is the Dow Chemical story done? Absolutely not. I still see juice in the shares, possibly up to $65 by end 2015. Why?







One, Dow Chemical benefits from twin global macro trends, the accelerating growth in the US economy and the fracking related falls in natural gas, ethane and propane prices used as feedstocks for its cast petrochemicals businesses. This means higher volume growth, operating margins and even pricing.







Two, population growth, the energy revolution and environmental issues will boost demand for chemical industry growth in the next decade. I am bearish on Germany'sBASF, Linde, Holland's Akzo, France's Air Liquide or Switzerland'sClariant in global markets. Dow chemicals, after its $16 billion takeover of Rohm and Haas financed by Warren Buffett and the Kuwait Investment Office is the ultimate market leader in specialty chemicals. For instance, Saudi Aramco partnered with Dow in its $20 billion Sarada petrochemical project in the kingdom. Thanks to Gulf Coast shale gas inputs, Dow is the lowest-cost commodity chemical producer that will wrest market share in higher-value downstream petrochemical markets from its European competitors.







Three, Dow Chemicals owns a world-class agricultural sciences division that earns $1 billion-plus in profits and could well be worth $15-$17 billion in a spinout or IPO. This division has pioneered research into DNA traits and herbicide resistant crops in the US Farm Belt. Any spinoff or IPO for the Ag Division will ignite Dow shares.







Four, Andrew Liveris has committed to double Ebitda by 2018 as Dow divests low margin commodity chains and gains market share in downstream petrochemicals/specialty chemicals. Dow is a global colossus, with $58 billion in revenues, 300-plus chemical plants in 36 countries and an operating history that goes back to 1897, giving it a longer and more illustrious pedigree than goes most sovereign states in the United Nations. Dow has the best research, development platform in global chemical and pioneered water purification process technologies in the past decade. This is the reason Saudi Arabia offered Dow a 35 per cent stake in Sadara, which would well contribute $600-$700 million in post startup earnings. This means $4 EPS next year is not unrealistic.







Five, I wonder if investors in the Gulf appreciate the strategic transformation of the performance plastics division. Ethylene, the basic chemical used for plastics, will benefit from limited global capacity at a time of rising demand.







Six, Dow generates one-third of its sales in Europe that accounts for one-fourth of its work force. European job cuts and plant closures will be inevitable and a share price catalyst.







Seven, Dow Chemicals is the world's leading diversified chemical firm that is now a market leader in chlorine, ethylene oxide, olefins, coating materials and plastics. Chemical industry strategists expect EPS to rise to $7 by 2017. This 117-year-old global chemical business is literally being reinvented. I once loved O-level Chemistry in the Jurassic Age. And I love Dow now!




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Source: Khaleej Times (United Arab Emirates)


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