Sustainable Innovations And Strategic Investments Poised To Drive Long-term Growth And Shareholder Returns

Key Takeaways

• Investment in high-demand circular economy markets and strategic growth projects like Path2Zero indicates a focus on sustainable, long-term profitable growth.
  
• Disciplined operational and financial strategies, including efficient cash flow generation and share repurchases, aim to enhance shareholder returns over time.
  
• Economic recovery delay, sales decline, high dependency on key segments, and geopolitical tensions may risk earnings stability and impact revenue.

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.

• Growing global demand for polyethylene, coupled with the full absorption of new capacity in North America, points to improving supply-demand fundamentals in Packaging and Specialty Plastics, likely benefiting both revenue and margins.
  
• The startup of the Glycol-2 facility in Louisiana is expected to offer a sequential tailwind of $75 million in the third quarter, indicating an uplift in the Industrial Intermediates & Infrastructure segment's earnings.
  
• Investment in differentiated portfolio areas, such as advanced recycling technologies through acquisitions like Circulus, supports long-term profitable growth by entering the high-demand circular economy market, potentially enhancing net margins through higher-value product offerings.
  
• Strategic growth investments, including countercyclical projects like the Path2Zero project in Fort Saskatoon, are projected to add over $3 billion in annual earnings growth by 2030, reflecting a significant upside in EBITDA through expansion in high-value, sustainable product lines.
  
• The disciplined operational and financial approach, including efficient cash flow generation and strategic share repurchases, implies a strong foundation for sustainable growth, likely enhancing earnings per share and shareholder returns in the long term.

Assumptions

• Analysts are assuming Dow's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $5.13) by about August 2027, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.5 billion in earnings, and the most bearish expecting $3.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2027 earnings, down from 32.2x today. This future PE is lower than the current PE for the US Chemicals industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

Risks

• Global economic recovery slower than expected, particularly in building, construction, and consumer durables which could dampen demand and impact revenue.
  
• Decline in net sales year-over-year and local price decrease could indicate pricing pressure and reduced market power, potentially eroding margins.
  
• High dependency on Packaging & Specialty Plastics and Performance Materials & Coatings segments, with notable year-over-year decrease in operating EBIT in the former, could risk earnings stability.
  
• Mixed market conditions in the Industrial Intermediates & Infrastructure segment, with potential headwinds from planned maintenance activity, could reduce net margins.
  
• Geopolitical tensions and global interest rates increases may continue to add to operational and financial uncertainties, impacting both revenue and earnings.

Valuation

• The analysts have a consensus price target of $59.15 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 $72.0, and the most bearish reporting a price target of just $52.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $49.4 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $52.48, the analyst's price target of $59.15 is 11.3% 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.