Polyurethanes Portfolio Optimization And Sustainability Drive Future Growth And Margins

Key Takeaways

• Dow's strategic focus in Europe, including asset reviews and sales, aims to optimize the portfolio and invest in higher-margin businesses, enhancing shareholder value.
  
• Investments in sustainable projects, including recycling and zero-emission production, are set to boost revenue, operational efficiency, and financial flexibility.
  
• Dow's revenue and margins face threats from uncertain macroeconomic conditions, supply chain disruptions, regulatory risks, and rising costs across key segments.

Catalysts

Through its subsidiaries, engages in the provision of 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.

• Dow's strategic asset review in Europe, focusing on polyurethanes, could lead to portfolio optimization and asset sales, which would allow the company to invest more in higher-margin businesses. This is expected to improve net margins and long-term shareholder value.
  
• The Path2Zero project in Fort Saskatchewan, aimed at producing ethylene with zero Scope 1 and 2 emissions, is progressing well. The project is likely to enhance Dow's competitive advantage with lower-cost production and clean hydrogen, potentially increasing future EBITDA.
  
• Dow's acquisition of polyethylene recycler Circulus and the expansion of capacity for recycled materials are expected to contribute to revenue growth by tapping into the growing demand for sustainable products and circular economy solutions.
  
• The ongoing ramp-up of Dow's facilities, such as the Glycol 2 and other capacity expansions, are anticipated to drive volume growth and operational efficiencies, thus impacting earnings positively in the coming years.
  
• Dow's focus on unique cash flow levers and strategic asset actions are aimed at maintaining strong financial flexibility, which allows for continued investments in growth projects and enhances shareholder returns, potentially boosting earnings and cash flow.

Dow Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dow's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 6.9% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $4.76) by about November 2027, up from $1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2027 earnings, down from 30.0x today. This future PE is lower than the current PE for the US Chemicals industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

Dow Future Earnings Per Share Growth

Risks

• Uncertain macroeconomic conditions in Europe and China combined with low demand can negatively affect revenue growth prospects, particularly given Dow’s exposure to these regions.
  
• Dow faces higher inventories due to labor-related supply chain disruptions, which can pressure net margins if demand fails to materialize.
  
• The strategic review of European assets, particularly in the polyurethanes business, highlights potential regulatory risks and operational headwinds, possibly impacting earnings from the region.
  
• Rising feedstock costs could erode operating margins in the Packaging & Specialty Plastics segment if not offset by corresponding price increases in their products.
  
• Consumer and infrastructure demand is subdued due to inflationary pressures, which could negatively impact revenue growth in key segments like Industrial Intermediates & Infrastructure.

Valuation

• The analysts have a consensus price target of $56.84 for Dow based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $51.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $48.3 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $44.99, the analyst's price target of $56.84 is 20.9% higher.
  
• 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.