Sale Of Gulf Coast Assets Will Generate $3 Billion For Future Investments

Key Takeaways

• Increased production in Texas and Gulf Coast asset sales boost Dow's financial flexibility and potential revenue growth.
  
• Cost reduction measures and Path2Zero project aim to improve margins and secure long-term earnings growth.
  
• Dow faces revenue growth challenges due to pricing pressure, macroeconomic headwinds, cost increases, and geopolitical uncertainties, impacting margins and future earnings.

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.

• Dow is ramping up operating rates at its Texas-8 cracker and Glycol-2 unit, which could contribute to increased production capacity and potentially higher revenue and earnings in the future.
  
• The sale of a minority stake in U.S. Gulf Coast infrastructure assets is expected to generate up to $3 billion in cash proceeds, enhancing financial flexibility for future growth investments and potentially improving cash flow metrics.
  
• Initiatives to reduce costs by $1 billion and cut CapEx by $300 to $500 million are aimed at improving net margins and cash flow, supporting long-term competitiveness through economic cycles.
  
• Dow's Path2Zero project in Fort Saskatchewan is expected to generate approximately $1 billion in incremental EBITDA annually by 2030, marking a significant forward-looking revenue and earnings growth opportunity.
  
• The planned strategic review of select European assets and the potential idling of high-cost operations highlight actions to optimize the portfolio, which could lead to more efficient resource allocation and improved net margins.

Dow Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dow's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 4.7% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $3.03) by about April 2028, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.9 billion in earnings, and the most bearish expecting $1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, up from 16.5x today. This future PE is greater than the current PE for the US Chemicals industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

Dow Future Earnings Per Share Growth

Risks

• Dow's net sales decreased by 2% year-over-year in the fourth quarter, reflecting industry-wide pricing pressure, which could signal ongoing challenges in maintaining revenue growth.
  
• The company faces persistent weak macroeconomic conditions and is undertaking a strategic review of its European assets, potentially indicating structural demand challenges, particularly in the polyurethanes business, which could impact future earnings.
  
• First-quarter 2025 earnings are projected to decrease due to higher anticipated feedstock costs and increased planned maintenance, indicating potential pressure on net margins.
  
• Dow announced cost reductions and CapEx cuts to navigate the prolonged economic downturn, highlighting concerns about maintaining sufficient free cash flow and potentially affecting the company's ability to invest in growth.
  
• Global manufacturing is contracting, and ongoing geopolitical uncertainties, including potential tariffs and economic policies in China, may further impact revenue and market stability.

Valuation

• The analysts have a consensus price target of $40.647 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 $65.0, and the most bearish reporting a price target of just $29.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $46.2 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 8.5%.
• Given the current share price of $25.81, the analyst price target of $40.65 is 36.5% 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.