Dow Inc.’s DOW shares have lost 26.5% in the past six months, underperforming the Zacks Chemicals Diversified industry’s decline of 4.4%. The bearishness reflects headwinds from soft end-market demand amid an unfavorable macroeconomic environment and pricing pressure, which have weighed heavily on the stock.
Technical indicators show that DOW has been trading below the 200-day simple moving average (SMA) since Oct. 7, 2024. The stock is also currently trading below the 50-day SMA. Following a death crossover on July 29, 2024, the 50-day SMA continues to read lower than the 200-day SMA, indicating a bearish trend.
Dow’s Shares Trades Below 50-Day SMA
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Given the significant pullback in Dow’s shares, investors might be tempted to snap up the stock. But is this the right time to buy DOW? Let’s find out.
Soft Demand, Pricing & Cost Headwinds Take Toll on DOW Stock
DOW faces challenges from demand softness in Europe and China. Lower consumer spending amid inflationary pressures is affecting demand in Europe. Construction and manufacturing activities remain soft in the region. Demand in Asia has been affected by weaker demand recovery in China. The property sector remains sluggish in China with declining new home prices.
Demand in infrastructure including residential construction, remains weak. Inflationary pressures are hurting consumer durables and building and construction demand. Demand in infrastructure including residential construction, also remains weak. Dow sees softness in automotive in Europe due to low demand. Soft conditions across these markets are likely to weigh on volumes in the near term. Demand is expected to remain pressured by elevated inflation, low consumer confidence in Europe, and geopolitical tensions, particularly in building and construction, and durable goods markets. Dow expects weak macroeconomic conditions to continue across most end markets and regions over the near term.
Dow is also being challenged by weak siloxane prices in its Performance Materials & Coatings unit. The segment continues to see siloxane pricing pressure partly due to supply additions in Asia. Siloxane prices remain under pressure due to competitive pricing pressure resulting from additional supply driven by capacity additions in China. While capacity additions have slowed lately, elevated industry supply is expected to continue to impact prices over the near term.
The company faces headwinds from higher feedstock and energy costs. Severe cold weather has contributed to an uptick in feedstock prices. Dow expects a $100 million headwind in the first quarter of 2025 in the Packaging & Specialty Plastics segment due to higher feedstocks and energy costs and lower global integrated margins. It also sees consolidated earnings to decline by $200 million in the first quarter from the prior quarter factoring in higher expected feedstock costs.
High-Return Growth Projects & Cost Actions Aid Dow
DOW benefits from its differentiated portfolio and low-cost feedstock positions. It remains focused on investing in attractive areas through highly accretive projects. Disciplined and balanced capital allocation priorities also support its Decarbonize and Grow strategy to deliver long-term value creation for its shareholders. DOW is advancing its Decarbonize and Grow, and Transform the Waste strategies, which are expected to deliver more than $3 billion in underlying earnings annually by 2030.
The company received a definitive green light from its board in November 2023 for its Fort Saskatchewan Path2Zero initiative, marking a significant milestone in its commitment to building the world's inaugural net-zero Scope 1 and 2 emissions-integrated ethylene cracker and derivatives facility in Alberta, Canada.
The project involves the construction of a new ethylene cracker, a 2-million MTA polyethylene capacity expansion and retrofitting the existing cracker to achieve net-zero Scope 1 and 2 emissions. It is expected to generate $1 billion in EBITDA growth annually throughout the economic cycle and decarbonize 20% of Dow's global ethylene capacity. The investment positions DOW to meet increasing demand in lucrative markets such as packaging, infrastructure and hygiene, with additional potential gains from the commercialization of low and zero-emission products. Dow has inked a long-term agreement with Linde for the supply of clean hydrogen at the Path2Zero project.
Dow also focuses on maintaining cost and operational discipline. It is taking action to cut costs by $1 billion to drive margins. The company expects to achieve the majority of the cost savings through a $500-$700 million reduction in direct costs and reduced labor costs, including a workforce reduction of around 1,500 roles globally. Dow is also reducing 2025 capital spending plans by $300-$500 million. The move is in response to the ongoing macroeconomic challenges and to support its long-term growth targets. Dow sees around $300 million in benefits from these actions in 2025 with full benefits expected by 2026.
DOW’s Solid Financial Health Supports Capital Allocation
DOW has a strong balance sheet and generates substantial cash flows, which allow it to finance its growth investments focused on higher-value businesses and regions and drive shareholder value. It generated cash from operating activities from continuing operations of $811 million in the fourth quarter and roughly $2.9 billion in 2024. It ended 2024 with solid liquidity of around $12 billion, including cash and cash equivalents of roughly $2.2 billion. DOW returned $2.5 billion to shareholders in 2024, comprising $2 billion in dividends and $0.5 billion in share buybacks.
Dow, in December 2024, reached a definitive deal to sell a 40% equity interest in select U.S. Gulf Coast infrastructure assets to a fund managed by Macquarie Asset Management. DOW anticipates getting about $2.4 billion in initial cash proceeds from the sale of its 40% minority equity interest, with the potential to generate cash proceeds of up to roughly $3 billion for a 49% minority stake. Macquarie Asset Management will have the option to increase its ownership stake to 49% within six months of the transaction's closure. The deal increases financial flexibility and allows for continuous cash deployment into the most attractive initiatives that will generate long-term value for its shareholders.
DOW offers a healthy dividend yield of 7.1% at the current stock price. While DOW has a high payout ratio of 164%, its dividend is perceived to be safe and reliable, backed by strong cash flows and sound financial health.
Dow’s Earnings Estimates Moving Down
The Zacks Consensus Estimate for DOW’s 2025 earnings has been going down over the past 60 days. The consensus estimate for first-quarter 2025 earnings has also been revised downward over the same time frame.
Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
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DOW Trades at a Modest Discount
DOW is currently trading at a forward P/E of 17.23X, higher than its five-year median. It represents a roughly 1.1% discount when stacked up with the industry average of 17.43X.
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DOW Stock Underperforms Industry & S&P 500
DOW’s price performance has been lackluster, reflecting headwinds from soft end-market demand amid an unfavorable macroeconomic environment and pricing pressure. Its shares have tumbled 30.2% over the past year, underperforming the industry’s 1% decline and the S&P 500’s increase of 24.1%. Its peers, LyondellBasell Industries N.V. LYB and BASF SE BASFY have lost 20.4% and 0.6%, respectively, while Eastman Chemical Company EMN has gained 18.2%, over the same period.
DOW’s One-year Price Performance
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How Should Investors Play the DOW Stock?
While DOW benefits from its cost and productivity actions and investment in high-return projects, it is exposed to weak demand in a challenging environment as well as pricing and cost headwinds, which have led to its underperformance. This, coupled with declining earnings estimates cast a pall on the company's prospects. It is not advisable to buy the dip in this Zacks Rank #5 (Strong Sell) stock until market conditions improve.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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