The Other Dow ... Dow Chemical

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Most people have been marveling at the Dow Jones breaking 13,000 recently, but I’ve been eying a different Dow: Dow Chemical.

Dow Chemical's (NYSE: DOW) stock has spent most of the past year hovering in the twenty-something dollar region, trading at almost half the value it held last spring. The diversified manufacturing company’s stock price has plunged from the $38 - $42 trading range it enjoyed one year ago. Even with its slight recent up tick, there's still an argument that Dow Chemical is trading below value.

I suspect this company might have been unfairly punished by the broader market. Its financial data doesn’t justify the knockdown in price.

Dow Chemical is posting three consecutive years of revenue growth, from $44 billion in 2009 to $53 billion in 2010. Last year its sales fell just shy of $60 billion. Diluted EPS jumped from $2.26 last year to $2.92 this year, and its debt-to-asset ratio has held steady for the past three years, at just north of 25 percent. Meanwhile, management announced yet another dividend increase last spring. In short: the financials of this company seem solid. It’s not an once-in-a-lifetime golden deal, but it’s certainly respectable.

Dow’s moat comes from its market dominance: competitors like the Huntsman Corporation (NYSE: HUN), which also manufactures chemical products, aren’t playing in the same ballpark. Huntsman has a market cap of $3.2 billion, while Dow Chemical is twelve times larger, at $40.1 billion. The two companies aren’t even in the same decimal-point range.

Dow Chemical’s size helps the company stay well-diversified: it manufactures everything from chemicals to plastics to appliances. It’s involved in furniture, carpet, pharmaceuticals, paint, adhesives, processed foods, paper, electronics and agriculture. With a manufacturing portfolio that wide, Dow doesn’t need to worry about a dip in one sector.

Many companies either focus on consumer staples – a stable, slow-growth sector – or focus on technology, a “hot” growth sector with a nice heap of risk. Dow Chemical does both. The company’s expertise is the growth-and-tech side of consumer items: within the past month, for example, it announced new joint ventures in manufacturing lithium-ion batteries (which are used in portable electronics like cameras) and carbon fiber (used in making bicycles, sailboats, tent poles, laptops and other everyday goods).  

Later this year it plans to ramp up the manufacturing of thin-film solar cell roofing shingles that can be installed onto new construction homes. Home developer Pulte (NYSE: PHM) has already tested a few prototypes and is reportedly happy with the result. Over the coming years, as Americans gobble up the housing glut and new home construction starts picking up again, Dow stands poised to ride the wave.

Dow has close partnerships with key industry leaders in Saudi Arabia, India, Turkey, China and many other leading growth nations worldwide, and it sells its products to customers in 160 countries. Those partnerships and that breadth allow the company to simultaneously hedge currency risk while taking advantage of global growth.

The company’s trailing 12-month P/E stands at 16.5, which is slightly higher than the industry average of 14.4. This reinforces my belief that Dow – with its secure financials, wide moat and good diversification – isn’t a screaming buy-it-now deal of a lifetime, but it’s probably a solid addition to a balanced portfolio.


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