Dow Analyst Says Meaningful Recovery Unlikely Amid Global Trade Turmoil

Although Dow Inc DOW is among the most diversified pure-play commodity companies, most of its businesses have come under pressure in 2019 due to persistent global trade issues — and a meaningful recovery is unlikely this year, according to BMO Capital Markets.

The Analyst

John McNulty downgraded Dow from Outperform to Market Perform and reduced the price target from $58 to $52.

The Thesis

Most of Dow’s operations are expected to witness continued pressure, McNulty said in a Monday downgrade note. (See his track record here.) 

At the company’s PMC segment would continue to be under pressure, 35 percent of Dow's silicones portfolio has exposure to tough pricing dynamics and weaker-than-expected demand for architectural coatings, the analyst said. 

In II&I segment, APAC MEG prices have been on the decline and there has been continued weakness in MDI/TDI pricing across geographies, McNulty said. 

"In P&SP, the U.S. should benefit from the price hike seen in April and continued low ethane prices, with Europe being stable, although with the plethora of new supply coming online, we continue to see margin compression as a risk," the analyst said. 

Dow has indicated that Chinese tariffs should have an EBITDA impact of $80-$100 million, up from a prior estimate of $40-$50 million, according to BMO.

Although this may seem small compared to Dow’s total EBITDA, the associated macro risk remains high, with consumer confidence, demand and consumption waning and capital allocation being postponed, leading to lower macro growth, McNulty said.

BMO lowered its the EBITDA estimates for 2019, 2020 and 2021 to $7.67 billion, $8.55 billion and $9.5 billion, respectively, while reducing the EPS estimates to $3.99, $4.82 and $5.75, respectively.

Price Action

Dow shares were falling by 3.64% to $49.29 at the time of publication Monday. 

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