Decarbonization Will Squeeze Legacy Chemical Margins In Overcapacity

Key Takeaways

• Global decarbonization trends and regulatory pressures are undermining demand for Dow's traditional products, compressing margins and threatening long-term profitability.
  
• Industry overcapacity and the need for heavy reinvestment are depressing earnings, restricting cash flow, and limiting shareholder returns.
  
• Cost-cutting, investment in efficient assets, and focus on sustainable, growing markets are strengthening Dow's margins, cash flow, and positioning for long-term earnings growth.

Catalysts

Through its subsidiaries, provides various materials science solutions for packaging, infrastructure, mobility, and consumer applications in the United States, Canada, Europe, the Middle East, Africa, India, the Asia Pacific, and Latin America.

• Persistent global pressure to decarbonize and implement circular economy models is expected to decrease demand for Dow's legacy petrochemical and single-use plastic products, contributing to long-term revenue attrition and preventing a return to historical peak volumes.
  
• Intensifying regulatory scrutiny and potential for costly new compliance requirements related to chemical pollution and single-use plastics in key regions are likely to drive up operating expenses, compress net margins, and undermine profitability over time.
  
• Ongoing industry overcapacity, triggered by new entrants and aggressive state-backed expansion in Asia, is heightening competitive pricing pressure in Dow's core segments; this dynamic is expected to structurally erode integrated margins for years, resulting in lower-than-anticipated earnings recovery.
  
• Dow's reliance on cyclical, energy-intensive commodity chemicals is leaving its earnings profile increasingly vulnerable to raw material and energy cost volatility, with decarbonization and energy transition initiatives worldwide expected to exacerbate margin instability and reduce long-term earnings visibility.
  
• The need for high capital reinvestment in plant modernization, regulatory compliance, and sustainability adaptation will likely restrain free cash flow growth and limit shareholder returns, as evidenced by the recent 50% dividend cut and delayed growth projects, extending the timeline for meaningful earnings per share expansion.

Dow Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Dow compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Dow's revenue will decrease by 1.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.4% today to 3.8% in 3 years time.
• The bearish analysts expect earnings to reach $1.5 billion (and earnings per share of $0.99) by about July 2028, up from $-994.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from -17.1x today. This future PE is lower than the current PE for the US Chemicals industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 1.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.81%, as per the Simply Wall St company report.

Dow Future Earnings Per Share Growth

Risks

• Dow's ongoing investment in new, lower-cost, high-efficiency production assets-such as the Poly-7 polyethylene train and the new alkoxylation facility-positions the company to capture market share and drive earnings growth when industry conditions recover, supporting a potential rebound in both revenue and net margins.
  
• The company's aggressive $1 billion cost reduction program, paired with portfolio optimization and cash-generating asset sales, is structurally improving Dow's margins and free cash flow, enhancing its ability to deliver higher earnings and shareholder returns through the cycle.
  
• Secular growth trends in packaging, consumer goods, mobility (especially electric vehicles), and data center infrastructure continue to drive resilient demand for Dow's advanced materials and specialty products, which could boost long-term sales and margin recovery as global macro conditions eventually stabilize.
  
• Strategic exposure to sustainability and circular economy markets-demonstrated by new supply agreements for low-carbon solutions and growing downstream silicones demand-positions Dow to benefit from regulatory and customer shifts toward greener materials, supporting differentiated product pricing and revenue growth.
  
• The company is maintaining strong balance sheet flexibility, with significant near-term cash support from asset sales, anticipated legal proceeds, and a delayed capital program, which enables disciplined capital allocation to organic growth projects, potential share repurchases, and attractive dividends as earnings normalize, all of which are supportive of long-term earnings growth and return on equity.

Valuation

• The assumed bearish price target for Dow is $20.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Dow's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $40.4 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $23.92, the bearish analyst price target of $20.0 is 19.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.