ModernGraham Valuation: Dow Chemical Corp (DOW)
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 and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
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
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $25.05 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $27.70 |
| Value Based on 0% Growth | $16.24 |
| Market Implied Growth Rate | 6.72% |
| Net Current Asset Value (NCAV) | -$34.56 |
| PEmg | 21.93 |
| Current Ratio | 2.09 |
| PB Ratio | 2.12 |
Balance Sheet – 9/30/2013Â
| Current Assets | $25,009,000,000 |
| Current Liabilities | $11,993,000,000 |
| Total Debt | $17,487,000,000 |
| Total Assets | $90,925,000,000 |
| Intangible Assets | $17,113,000,000 |
| Total Liabilities | $66,920,000,000 |
| Outstanding Shares | 1,212,870,000 |
Earnings Per Share
| 2013 (estimate) | $3.18 |
| 2012 | $0.72 |
| 2011 | $2.07 |
| 2010 | $1.72 |
| 2009 | $0.22 |
| 2008 | $0.62 |
| 2007 | $2.99 |
| 2006 | $3.82 |
| 2005 | $4.64 |
| 2004 | $2.93 |
| 2003 | $1.88 |
| 2002 | -$0.44 |
Earnings Per Share – ModernGrahamÂ
| 2013 (estimate) | $1.91 |
| 2012 | $1.21 |
| 2011 | $1.47 |
| 2010 | $1.41 |
| 2009 | $1.66 |
| 2008 | $2.58 |
Conclusion:
Dow Chemical Corp is a strong company that qualifies for the Enterprising Investor but just misses the mark for the Defensive Investor. Â The company has not sufficiently grown its earnings over the ten year period and is trading at too high a PEmg ratio for the Defensive Investor. Â However, the Enterprising Investor is not quite as strict and is willing to accept a slightly higher level of risk. Â As a result, Enterprising Investors following Benjamin Graham’s value investing methods should feel comfortable proceeding with further research, perhaps beginning with a review of ModernGraham’s valuation of Exxon Mobil (XOM). Â From a valuation perspective, the company has only grown its EPSmg (normalized earnings) from $1.66 in 2009 to an estimated $1.91 for 2013. Â This historical performance does not support the market’s implied estimate of growth of 6.72%, so the company would appear to be overvalued at the present time.
What do you think?  Do you agree that Dow Chemical Corp is overvalued?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: Â The author did not hold a position in Dow Chemical Corp (DOW) at the time of publication and had no intention of changing that position within the next 72 hours.
Photo Credit: Â Andrew Magill
