Equity Analyst Sweet On Dow

Goldman Sachs analyst Robert Koort headed to Dow Chemical’s headquarters in Midland, Michigan, to talk to top execs. He came back smitten, reiterating his buy rating on Dow’s stock. Dow has been transforming itself from a commodity chemical to a specialty chemical company. The keystone was its purchase of Rohm and Haas last year. CEO Andrew Liveris has been hammering the transformation message to shareholders. He wants his company to be a high-growth, long-term investment, not a fast-money, cyclical play for speculators once or twice a decade. He must have been pleased when he read this in Koort’s report to clients: “We believe Dow shares remain somewhat stigmatized by its commodity chemical past as many investors fail to appreciate the transformation that has occurred, resulting in a much heavier weighting towards intermediate and specialty chemicals.” Aw! It is the sort of thing that I would say to my wife over a flickering candle on a night out without the kids. Koort theorizes that Dow’s transformation will be soon be vindicated by the much anticipated downturn in the ethylene chain caused by the deluge of new Middle Eastern capacity. When that happens, Koort says, Dow’s earnings from specialties will carry the day and investors will finally get the point. Perhaps, but only if the downturn is very dramatic. It might not be. Koort said that executives hinted as much when they “laid out a case for better than expected results in the ethylene chain.” Such a case can surely be made, at least from a Dow perspective. There is a slow, albeit timid, economic recovery underway that will absorb some new capacity. This recovery might be given plenty of time. All this capacity was originally supposed to start up years ago, but regional players have had difficulty ramping up the latest generation of plants. Who’s to say all this gets straightened out in the next couple of months? As for Dow, it has a strong position in North America. There, shale gas has helped make regional industry more competitive globally. The Middle Eastern capacity will have a bigger impact on higher-cost naphtha based producers in Europe in Asia. (Dow does, however, have three ethylene crackers in Europe and a JV in Thailand). Dow also makes ethylene and polyethylene in Bahia Blanca, Argentina. The country doesn’t offer the most secure natural gas feedstock supply in the world. But with Braskem soon to command a monopoly in Brazil, South American plastics converters will cherish Dow more than ever before. Now I’m sounding romantic. But indeed, there might be silver linings for Dow either way the downturn plays out.

Author: Alex Tullo

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