Dow Earnings: Shares Remain Undervalued as Global Economic Slowdowns Hinder Short-Term Performance

Dow’s DOW second-quarter performance reflected the adverse economic conditions worldwide, with total revenue down 27% year over year and down 4% sequentially. The firmwide EBITDA margin declined more than 600 basis points year over year owing to lower volumes across end markets (led by operations in Europe, the Middle East, and Africa) and lower pricing. Margins increased nearly 200 basis points sequentially, however, as a result of reduced input costs and operational efficiency gains as the firm progresses on its $1 billion cost savings initiative. We maintain our $72 fair value estimate and narrow moat rating, as we expect Dow’s performance will improve along with a global economic recovery around 2024 and beyond.

Despite our continued optimism regarding Dow’s long-run prospects, the firm’s second-half performance will likely prove similarly subdued versus the first half. Continued downward demand pressure coupled with broadly declining prices will contribute to further sequential sales declines next quarter. China’s slower-than-expected return to market exacerbates matters, as the anticipated rebound following cessation of its zero-COVID policies has yet to fully materialize. We nevertheless observe signs that end market recovery is forthcoming. We remind investors that Dow’s highly diversified product portfolio often mimics GDP growth, and some of its end markets and product offerings historically serve as indicators—both leading and lagging—of economic health. Current performance points to an in-progress slowdown, and management expressed expectations of reaching cycle bottom sometime in the fiscal second half. Broader economic factors such as low unemployment and easing inflation support enduring consumer demand. Furthermore, an expected end to federal-funds rate increases will support demand recovery in building and construction markets around 2024.