Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Defensive Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Dow Chemical Co. fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): The Dow Chemical Company combines the power of science and technology to passionately innovate what is essential to human progress. The Company connects chemistry and innovation with the principles of sustainability to help address many of the problems, such as the need for clean water, renewable energy generation and conservation, and increasing agricultural productivity. The Company conducts its worldwide operations through global businesses, which are reported in six operating segments: Electronic and Functional Materials, Coatings and Infrastructure Solutions, Agricultural Sciences, Performance Materials, Performance Plastics, and Feedstocks and Energy. In December 2013, W. R. Grace & Co announced that it has completed the acquisition of the assets of the Polypropylene Licensing and Catalysts business of The Dow Chemical Company.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$29.00|
|Value Based on 0% Growth||$17.00|
|Market Implied Growth Rate||7.67%|
|Net Current Asset Value (NCAV)||-$14.62|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Dow Chemical is suitable for the Enterprising Investor but not the Defensive Investor. The company has not shown sufficient earnings growth over the ten year period for the Defensive Investor and is trading at a high PEmg ratio. The Enterprising Investor’s only complaint is the high level of debt relative to the current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Exxon Mobil (XOM) and ModernGraham’s valuation of Monsanto (MON). From a valuation perspective, the company appears to be overvalued at the present time, having grown EPSmg (normalized earnings) from $1.66 in 2009 to only $2.00 for 2013. This low level of demonstrated growth does not support the market’s implied estimate of 7.67% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is below the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Dow Chemical (DOW)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in Dow Chemical (DOW) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.