Dow Chemical is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor’s only concern is the insufficient level of earnings growth over the last ten years, while the Enterprising Investor’s only issue is with the high level of debt relative to the net current assets. However, these issues are not enough to deter either investor type from proceeding with further research. In fact, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
As for the valuation, the company has grown its EPSmg (normalized earnings) from $1.44 in 2010 to an estimated $2.40 for 2014. This demonstrated growth exceeds the market’s implied estimate of 5.33%. In fact, the demonstrated growth, after being discounted by a margin of safety, supports an estimate of 10.10% growth. As a result, the ModernGraham valuation model returns an estimate of intrinsic value well above the market price at this time, and the company appears to be undervalued by the market. Value Investors are therefore encouraged to proceed with further research to determine whether Dow Chemical is suitable for their own individual portfolios.