We maintain a Neutral recommendation on chemical giant The Dow Chemical Company (DOW).
Dow continues to deliver cost synergies from the Rohm & Haas (ROH) acquisition, which is expected to consolidate the higher margin and higher growth specialty businesses while reducing volatility in earnings and cash flow.
Joint ventures and acquisitions are integral parts of Dow’s growth strategy. They provide access to potential markets, new technologies and feedstock, while at the same time lowering capital investment and risk.
Dow became the world’s leading specialty chemicals and advanced materials company after acquiring ROH for $16.3 billion. The acquisition has increased Dow’s position in the Specialty Chemicals market by broadening its product range in paints, coatings and electronic materials.
In February 2011, Dow announced it would close two vinyl chloride monomer (VCM) production units in 2011. Dow will shut down a production unit in Oyster Creek, Texas in the first quarter of 2011. The closure of a second VCM unit, located in Plaquemine, Louisiana was announced in 2009. The Louisiana plant will cease operations in the third quarter of 2011.
These are a continuation of the decisive actions taken by Dow to right-size its core chemicals manufacturing footprint and shift basic feed stocks toward performance derivative businesses. Previously, Dow had announced plans to close 20 production plants in high-cost areas, divest several non-strategic businesses and temporarily idle about 180 production plants (30% of the plants worldwide).
We believe that management’s strategy of selling equity interests in commodity assets is appropriate, though these units continue to produce good results as the global economy strengthens. Dow’s net debt is $20.6 billion following completion of the Rohm and Haas transaction and subsequent divestitures, equity offerings and debt retirement.
Dow is focusing on its core business and has been divesting non-strategic assets. However, we are wary of the macro trends. Despite reporting excellent fourth-quarter 2010 results, we believe slower recovery in the developed markets of the US and Europe, excess supply conditions in key commodities and higher raw material costs could restrain growth.
Dow faces stiff competition from BASF SE, EI DuPont de Nemours & Co. (DD) and Exxon Mobil Corp. (XOM).
We maintain our long-term Neutral recommendation on Dow Chemical. Currently, it holds a short-term Zacks #1 Rank (Strong Buy) on the stock.
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