Dow Chemical Shares Unaffected Following Susquehanna Upgrade to Positive

Despite a recent ratings upgrade, Dow Chemical Co DOW is down 2 percent on the day, trading at $45.74.

According to a Sunday report from Susquehanna Financial Group, Dow has justified a ratings upgrade to Positive based upon an updated valuation analysis.

The Analysis

Susquehanna recently completed a revised valuation, changing the approach to now "apply the equity ratio to the pro-forma capital structure resulting in a 50/50 split," taking into consideration the DowDuPont combined entity.

"As a result," the analyst note explained, "we arrive at a $54 price target for DOW and a $69 price target for DD (E I Du Pont De Nemours And Co DD), which represent 16 percent and 17 percent upside respectively."

"As such," the note continued, "we are maintaining our Positive rating on DD shares and upgrading DOW to a Positive rating, based on 15+ percent upside."

Related Link: Dow Chemical Jumps 3% Following Q4 Report

The Sector

Susquehanna placed the upgrade and price target against the backdrop of the sector as a whole.

Within that context, the analysts commented, "Ag self-help measures keep us positive despite headwinds."

The note continued, "We see another challenging year for the Ag sector driven largely by macro headwinds such as credit and currency (Brazil), elevated CPC channel inventories (Brazil, to a lesser extent North America), and competitive seed pricing (North America)."

The analysts further justified their position by highlighting two key points: "We remain positive on the combined company's Ag segment given 1) DD and DOW's pursuit of cost reductions in Ag prior to the 2H16 closure of MergeCo, and 2) our expectation of $1.25 billion of cost (primarily R&D) and $500 million of growth synergies for AgCo."

Other Factors

Susquehanna also mentioned the following:

• Ownership And Dow: "Conversion of preferred shares will tip ownership balance slightly in Dow's favor."
• Share Repurchases: "DOW has reiterated its $2 billion commitment to share repurchases in 2015, however due to the pending merger the company is precluded from buying back shares until after the proxy vote, likely in the middle of the year."
• Performance Plastics And Volume Growth: "DOW reported 4Q15 Performance Plastics sales of $4.6 billion and EBITDA of $1.3 billion that exceeded our expectations from higher than expected margins […] Looking ahead to 2016, we expect volume growth from new projects."
• Adjusted EPS And EBITDA: "We have adjusted our 2016 EPS to $3.60 and EBITDA to $9,165 million (prior $3.25 and $8,720 million) to account for the addition of Dow Corning in 2H16, and higher margin expectations in the Performing Plastics and Ag Sciences businesses."

In addition to the upgrade, Susquehanna increased its price target on Dow Chemical from a previous $46 to the current $54.

DuPont's current rating by Susquehanna is Positive, with a lowered price target of $69 from $77.