Why Key Analyst Sees Roughly a 25% Upside in Dow Chemical

As a result, the investment bank elevated Dow to the Wells Fargo Securities Priority Stock List. The investment bank also maintained its $0.73 third-quarter earnings estimate, versus the consensus estimate of $0.69, but trimmed the sales estimate to $12.15 billion from $12.50 billion, reflecting the impact of lower pricing (driven by lower oil) and foreign exchange rates. Wells Fargo has a valuation range of $54 to $56, which at the average implies upside of 26% from current prices.

Wells Fargo commented in its report:

We walked away more comfortable in global demand trends and the sustainability of profit and free cash flow (FCF) growth. A low end of expectations would see a $2 billion increase in FCF by 2018 (up a mere 60% from 2014). With company specific projects the key driver along with an action plan to reduce spending, a dividend yield 75% higher than the S&P 500, aggressive share repurchase lurking around the corner, our (longheld) belief in sustainably of above-average ethylene-chain profits.

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Quarter-to-date demand trends actually have been favorable, with increases in every segment and geography. China concerns feel overblown as Dow is seeing growth from the first half at a high-single-digit rate. North America remains “a shining star” with favorable trends in packaging, auto and building and construction, according to Wells Fargo.

While upstream ethylene has been more volatile, elevated PE operating rates and demand growth is expected to lead to a healthy market through the end of the decade as capacity additions likely will be absorbed. Europe is posting “modest black numbers,” a welcome change from the previous red ink, and Latin America ex-Brazil is okay.

The investment bank gave its investment thesis as:

Between all the actions Dow is taking to optimize its portfolio, and given a number of potential growth catalysts in the near-term, Dow’s shares remain attractive despite the decline in oil, in our view. A recently boosted dividend puts the yield above the group average, and share buybacks are a key theme.

Previously, Merrill Lynch started Dow as a Buy rating with a $55 price target in the past week.

Shares of Dow were down 0.7% to $43.49 Monday morning. The stock has a consensus analyst price target of $54.33 and a 52-week trading range of $35.11 to $54.58.

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