Novice Investing - Digging Into Dow

Date: Thursday 07th 2008f August 2008 01:44:18 PM

Digging Into Dow - 02/06/2007

By: Hari Wibowo

Dow Chemical Co. (DOW) is one of the largest manufacturer of chemicals, plastics, agricultural and other products. Today, we are going to look at its hydrocarbon segment which includes benzene, butadiene, ethylene, propylene and styrene. GE Plastics reported annual revenue of $ 6.6 Billion and it is trying to fetch a $ 10 Billion price tag. How big is this compared to Dow's hydrocarbon business?

First, here are annual capacity of some Dow's plant which is fairly accurate: Benzene: 1691 KT Styrene: 1999 KT Ethylene: 4958 KT Propylene: 2479 KT (estimate) Butadiene: 826 KT (estimate)
For Propylene and Butadiene figure, we estimate based on the fact that a cracker generally produce a 60% Ethylene, 30% Propylene and 10% Butadiene. Therefore, based on Ethylene number, we can get the number of production of Dow's Propylene + Butadiene figure.

How about annual revenue? The following are the estimate of current commodity price for each: Benzene: $ 900/ T Styrene: $ 1200/ T Ethylene: $ 800/ T Propylene: $ 800/ T Butadiene: $ 800/ T
The above is a rough figure since these commodities will go up and down in a given day, just like crude oil price. For the sake of simplicity, let's assume that this number is fairly accurate for average selling price of all of 2007.

There is more complication rather than taking plant capacity and multiply it by its unit price. For example, if you mix Benzene + Ethylene, you will get Styrene. Therefore, Dow will produce Benzene only to convert it to Styrene and not to sell it. Also, a portion of Ethylene went into making Styrene (but not all). For your information, 0.8 Benzene + 0.3 Ethylene will make 1 Styrene. Therefore, the number of commodity available for sale is:

Benzene: 92 KT
Styrene: 1999 KT
Ethylene:4358 KT
Propylene: 2479 KT
Butadiene: 826 KT

By multiplying these with unit price, we get revenue of 92000 * $ 900 + 1999000 * $ 1200 + 4358000 * $ 800 + 2479000 * $ 800 + 826000 * $ 800 = $ 8.612 Billion. Using the same multiple as GE plastic, this part of Dow's business is worth $ 13.04 Billion or 33% of Dow's total market capitalization. Meanwhile, the above commodities is 18.6% of total Dow's revenue and they are notoriously thin margin. Using simple math, assuming that all of Dow's business is having similar thin margin as the hydrocarbon business (which they are not), Dow market capitalization should be worth $ 70.2 Billion or 78% appreciation from current stock price.

This is just one way to look at it. We have talked about Dow's undervalued stock in the past. But, in this case, there may be another possibility. That is, GE plastic price tag of $ 10 Billion may be too high. However, if GE plastic will be bought at the asking price, then Dow's stock has a potential to appreciate at least 78% more.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Dow Chemical Co. (DOW) or any other securities.

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