How Is Dow Chemical Valued Compared to Its Peers?



Dow Chemical’s forward PE

Forward PE (price-to-earnings) is a relative valuation method that considers a company’s future earnings for calculation. As of January 4, 2017, Dow Chemical (DOW) was trading at a one-year forward PE multiple of 14.3x, compared to peers Eastman Chemical (EMN) and LyondellBasell (LYB) at 10.6x and 9.0x, respectively.

The forward PE ratio tells how much investors are paying per dollar of expected earnings in the next 12 months. By using the PE ratio, you can compare two or more companies that operate in the same industry and decide which stock is overvalued or undervalued.

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DOW trades at a premium

Currently, Dow Chemical is trading at a premium compared to peers Eastman Chemical and LyondellBasell. With DOW posting better-than-expected 3Q16 earnings, its revenue is expected to rise due to the takeover of Corning’s (GLW) stake in the Dow Corning joint venture. DOW is expected to generate $1.0 billion in EBITDA (earnings before interest, tax, depreciation, and amortization) with synergies.

Another key revenue driver for DOW in the near future could be Sadara Chemical Company, a joint venture between Dow Chemical and Saudi Aramco (Saudi Arabian Oil Company). Sadara consists of 26 manufacturing units, and DOW’s three polyethylene trains are already commissioned. DOW has shipped polyethylene to nearly 100 customers in more than 25 countries.

Looking at DOW’s peers, we see that Eastman Chemical’s revenue has been struggling. LyondellBasell faced maintenance issue challenges in the first nine months of 2016.

In the first nine months of 2016, DOW’s net income margin was 11.4%. It outperformed Eastman Chemical, which posted a net income margin of 10.8%. LyondellBasell’s margin was higher at 14.4%, although its maintenance issues did cause its stock to fall.

You can hold Dow Chemical indirectly by investing in the iShares US Basic Materials (IYM), which has invested 11.5% of its portfolio in Dow Chemical as of January 4, 2017.


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