We've been asking ourselves recently if the market has placed a fair valuation on Dow. Let's dive into some of the fundamental values of this large-cap Industrials company to determine if there might be an opportunity here for value-minded investors.
A Lower P/B Ratio Than Its Sector Average but Trades Above Its Graham Number:
Dow Inc., through its subsidiaries, engages in the provision of various materials science solutions for packaging, infrastructure, mobility, and consumer applications in the United States, Canada, Europe, the Middle East, Africa, India, the Asia Pacific, and Latin America. The company belongs to the Industrials sector, which has an average price to earnings (P/E) ratio of 20.49 and an average price to book (P/B) ratio of 3.78. In contrast, Dow has a trailing 12 month P/E ratio of 13.9 and a P/B ratio of 1.95.
When we divide Dow's P/E ratio by its expected EPS growth rate of the next five years, we obtain its PEG ratio of -3.03. Since it's negative, the company has negative growth expectations, and most investors will probably avoid the stock unless it has an exceptionally low P/E and P/B ratio.
Growing Revenues With a Flat Capital Expenditure Trend:
| 2020-02-07 | 2021-02-05 | 2022-02-04 | 2023-02-01 | |
|---|---|---|---|---|
| Revenue (MM) | $42,951 | $38,542 | $54,968 | $56,902 |
| Gross Margins | 14.6% | 13.5% | 19.6% | 15.0% |
| Operating Margins | 8.2% | 6.6% | 14.4% | 10.0% |
| Net Margins | -3.16% | 3.18% | 11.48% | 8.05% |
| Net Income (MM) | -$1,359 | $1,225 | $6,311 | $4,582 |
| Net Interest Expense (MM) | -$852 | -$789 | -$676 | -$489 |
| Depreciation & Amort. (MM) | -$2,938 | -$2,874 | -$2,842 | -$2,758 |
| Earnings Per Share | -$1.83 | $1.65 | $8.41 | $4.0 |
| EPS Growth | n/a | 190.16% | 409.7% | -52.44% |
| Diluted Shares (MM) | 742 | 742 | 750 | 707 |
| Free Cash Flow (MM) | $7,967 | $7,520 | $8,793 | $9,532 |
| Capital Expenditures (MM) | -$2,037 | -$1,257 | -$1,593 | -$2,013 |
| Net Current Assets (MM) | -$29,615 | -$29,381 | -$21,358 | -$17,290 |
| Current Ratio | 1.57 | 1.72 | 1.73 | 1.95 |
| Long Term Debt (MM) | $15,975 | $16,491 | $14,280 | $14,698 |
| Net Debt / EBITDA | 7.46 | 2.92 | 1.44 | 1.81 |
Dow has growing revenues and a flat capital expenditure trend, exceptional EPS growth, and a steady stream of strong cash flows. However, Dow has slimmer gross margins than its peers, weak operating margins with a positive growth rate, and a highly leveraged balance sheet. Finally, we note that Dow has a decent current ratio.
