How Is Dow Chemical Valued Compared to Its Peers?



Dow Chemical’s valuations

Dow Chemical (DOW) announced its 1Q16 earnings on April 28, 2016. DOW stock fell 0.3%, from $53.60 to $53.42. The company reported operating EPS (earnings per share) of $0.89 in 1Q16 compared to 0.84 in 1Q15. This implies an increase of 6% on a year-over-year basis.

From April 28 to July 15, 2016, DOW stock has fallen 2.9%, from $53.60 to $52.06.

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Forward price-to-earnings

Forward PE (price-to-earnings) is a good relative valuation method that considers the company’s future earnings for calculation. In the past two years, Dow Chemical has been trading at a one-year forward PE multiple of 11.6x–16.6.0x.

As of July 15, 2016, Dow Chemical was trading at a one-year forward PE multiple of 13.9x compared to peers such as PPG Industries (PPG), LyondellBasell (LYB), and Eastman Chemical (EMN). They’re trading at one-year forward PE multiples of 16.4x, 8.0x, and 9.70x, respectively.

EV-to-EBITDA valuation

The EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiple is an important relative valuation multiple that’s widely used in capital-intensive industries such as the chemical industry. This multiple considers debt for calculation and is thus a better metric than PE ratio.

As of July 15, 2016, Dow Chemical’s one-year forward EV-to-EBITDA ratio was 8.0x. PPG Industries, LyondellBasell, and Eastman Chemical had forward EV-to-EBITDA ratios of 11.0x, 6.1x, and 7.4x, respectively. This multiple is calculated based on a company’s estimated EBITDA for the next 12 months.

Investors can hold Dow Chemical indirectly by investing in the Fidelity MSCI Materials ETF (FMAT), which has 7.7% of its portfolio in Dow Chemical as of July 15, 2016.

In the next part, we’ll look at analyst recommendations for Dow Chemical.


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