Dow Inc (NYSE:DOW) is one of the companies formed as a result of the recent split of DowDuPont (NYSE:DWDP) into three separate companies. Since then it has been an interesting few months for Dow stock. Let’s review:
DowDuPont, one of the world’s largest industrial chemical conglomerates, had originally been formed as a result of the merger of Dow Chemical and E.I. du Pont de Nemours that was announced in 2015 and completed in 2017.
On April 2, DOW shares started trading on the New York Stock Exchange. The same day, it replaced DowDuPont in the Dow Jones Industrial Average as one of the 30 stocks in the index. It has also been added to the S&P 500.
Hence it has been a somewhat confusing several weeks for the past owners of DWDP stock. Although the separation of the three companies is now complete on paper, there are likely to be more questions as it all shakes out. Dow is expected to report Q2 earnings on July 25.
A Closer look at DOW Stock
Following the three-way spin-off, Dow is now concentrating on its business as a commodities chemical producer. With over 100 manufacturing sites in 31 countries, DOW offers science-based products and solutions for a wide range of customers in packaging, infrastructure and consumer care. It has a market cap of $38 billion.
Dow’s Q1 earnings released on May 2 showed that net sales decreased 10% year-over-year (YoY) to $10.8 billion. In the quarterly statement, investors paid attention to the results from Dow’s three main divisions:
- Performance Materials & Coatings (net sales were $2.3 billion, down 2% YoY);
- Industrial Intermediates & Infrastructure (net sales were $3.4 billion, down 8% YoY); and
- Packaging & Specialty Plastics (net sales were $5.1 billion, down 15% YoY).
Performance materials include paints, coatings and silicones; industrials include chemicals, solvents and lubricants; packaging includes food packaging products, specialty polymers and hydrocarbons.
The company highlighted that both Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics witnessed margin declines, contributing to the decrease in profits and earnings in the first three months of 2019.
In the earnings call, management emphasized the group’s commitment to cost savings, which stood at $125 million for the quarter.
CEO Jim Fitterling said that following the separation from DowDuPont, Dow is now “well positioned to operate more productively, invest more prudently, grow more profitably and deliver higher returns to shareholders.”
The Board of Directors also declared a dividend of $0.70 per share to be paid on June 14 to stockholders of record as of May 31. The current dividend yield stands at a respectable 5.5%.
The company finally said that it expects some seasonal headwinds, especially regarding increased seasonal maintenance costs.
Understanding the DOW Stock Price Now
Following its listing, Dow initially went up about 10% in three trading days. Yet since then, it has gone down from an intraday high of 60.52 on April 4 to an intraday low of $46.75 on May 31. It is currently hovering around $48.
The selling pressure has increased especially after the Q1 earnings report of May 2.
Thus over the past two months stock has suffered from a damaging technical picture. Its short-term technical chart still looks weak, and it is pointing to the possibility for more downside around the corner.
Although DOW’s momentum indicators, which describe the speed at which prices move over a given time period, are currently in oversold territory, they can stay oversold for quite a long time, especially when the overall trend is down.
Therefore, more buy signals based on momentum indicators need to be conﬁrmed with further chart analysis before the stock is a buy from a technical standpoint.
In short, at this point, bears are in control. Therefore Dow shares will need a catalyst to make them attractive in the eyes of long-term investors, who are possibly still skeptical about the near-term prospects for the company.
If you still believe in the bull case for Dow stock, you might consider waiting for a better time to get long, such as around mid $40 levels.
The Bottom Line on Dow Stock
Going forward, investors would like to see concrete evidence in the results that considerable value can be achieved post-separation. Some questions that remain yet to be answered are the levels of operating margin as well as the free cash flow.
Wall Street does not expect Dow to be a high growth company. However, analysts want to see that it will remain a stable cash cow with strong dividends and manageable debt levels.
In the next earnings report, investors will also want to get a feel for any potential economic slowdown in the U.S. or globally as they could affect DOW stock’s revenues. As a commodity-based business, the group is understandably is prone to earnings declines during economic downturns.
Dow also relies on crude oil as a basic resource used in manufacturing. Therefore DOW stock is exposed to price fluctuations in crude, too. Thus management’s guidance, especially regarding the global economy and commodity prices, may indeed become quite an important section of the quarterly report.
In short, up until and around the Q2 earnings release, there is likely to be further volatility in the price of DOW stock with a downward bias.
However, in the long run, the group’s strong position in the industry, as well as the robust dividend yield, should support the price of Dow shares.
If you are not yet a shareholder of DOW stock, you may want to wait on the sidelines until you have had a chance to analyze the results. If you already own Dow shares, you may consider hedging your position with at-the-money (ATM) covered calls with July 19 expiry.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.