Novice Investing - Feeling the Chemistry at Dow Chemical

Date: Sunday 20th 2008f July 2008 12:54:36 PM

Feeling the Chemistry at Dow Chemical - 04/09/2007

By: Hari Wibowo

We have talked a couple of times regarding Dow Chemical Co. (DOW). Back in June 2006, I felt that Dow Chemical can earn a profit of $ 10.7 Billion should oil price drop to $ 50 per barrel over the next couple of years. The reasoning was that despite the rising crude oil price, Dow was expected to report profit of $ 4.76 per share for 2006. Actual profit was $ 3.88 per share, which was still great by any definition, considering the circumstances.

Oil price still hovers around $ 64 per barrels recently, about $ 6 lower than when we first talked about in on June 2006. (Oil price was $ 70 per barrels back then). Meanwhile, EPS estimate for 2007 is $ 3.96 per share. Thus, if oil price goes down to $ 50 per barrels, profit for Dow Chemicals is expected to soar. Naturally, stock price is undervalued at the low $ 40s.

So, then, you as investors, can buy Dow Chemicals and profit from it, right? Not so fast. Just this week, rumor had it that Dow Chemicals will be the next target for private equity buyers, which had been snapping up publicly traded companies eagerly. Reports had it that Dow will be bought up for roughly $ 50 Billion by groups of private investors, many from middle East. The company will then be broken up into pieces and sold separately according to investors' capital proportion. Interested parties include Reliance Industries of India, which had been bidders of GE Plastics division.

So, you see, private investors saw the value in Dow's business, which is worth more than current share price. The $ 50 Billion price tag is equal to roughly about $ 52 per share. We think that Dow might be worth more than $ 70 per share if oil price drops to the low $ 50s for a prolonged period. However, it hasn't happened thus far. After trading in the low $ 50s early in the year, oil price had rebound to the $ 60 per barrel mark this April. Who knows where oil price would go for the rest of the year. Regardless, Dow Chemicals is a good value either way. Also, as commodity such as oil is cyclical, this can only mean that oil price would start heading down sooner or later. Dow's new shareholders would be prosperous.

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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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