Dow Q1 2022 Earnings: Great Performance And Cheap Stock Price (NYSE:DOW)

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On April 21st of 2022, the management team at Dow (NYSE:DOW) announced financial results covering the first quarter of the company’s 2022 fiscal year. In addition to significantly outperforming on its top line, the company posted robust performance on its bottom line. Overall, growth for the enterprise has been encouraging and cash flows are strong, even though most recent results might not be replicable. Combined with the fact that shares are cheap and management is actively having the company buy up its own stock on the market, I cannot help but rate this an attractive prospect at this time.

A diverse industrial business

Few companies have the international recognition and long operating histories that Dow does. This firm is truly a global enterprise with a market capitalization of $49.3 billion and multiple operating segments that touch a wide variety of markets. The first and largest of these segments is called Packaging & Specialty Plastics. According to management, this unit is comprised of two different but integrated businesses. The first of these is the Hydrocarbons & Energy unit, while the other is called Packaging and Specialty Plastics.

Under the Hydrocarbons & Energy unit, the company produces and sells ethylene, which is largely consumed by this aforementioned segment for the purpose of producing packaging and miscellaneous specialty plastics. The unit is also responsible for the production of propylene and aromatics products that are used to produce everyday consumer goods. On top of this, the unit is also responsible for the production and procurement of the power and feedstocks used by the company’s manufacturing sites. Meanwhile, the Packaging & Specialty Plastics business offers a significant product pipeline that involves the production and sale of acrylics, copolymers, elastomers, low-density polyethylene, resin additives and modifiers, semiconductive and jacketing compound solutions, and more. Key and uses here include automotive parts, food and supply chain packaging, footwear products, housewares, photovoltaic encapsulants, sporting goods, and more. During the company’s 2021 fiscal year, this segment as a whole was responsible for 51.2% of the company’s revenue and for an impressive 67.8% of its profits.

The next segment to pay attention to is the Industrial Intermediates & Infrastructure segment. Like the Packaging & Specialty Plastics segment, this segment also houses two different business units. The first of these is called Industrial Solutions. That unit offers a variety of products like deicing fluids, ethylene oxide, surfactants, demulsifiers, shale inhibitors, and more. And use cases here include lubricant additives, paper, heat transfer fluids, solvents for electronics processing, and so much more. The other business unit is called Polyurethanes & Construction Chemicals. Through this, the company produces products like caustic soda, acrylic thermosetting resins, the company’s own brand of latex powder, acrylic emulsion polymers, and more. End uses here include the construction market, producers of caulks and sealants, cement-based tile adhesives, roof coatings, and more. Last year, this segment was responsible for 30.7% of the company’s revenue and 23.3% of its profits.

The last segment to pay attention to is called Performance Materials & Coatings. Through this segment, the company also has two different operating units. The first of these is called Coatings & Performance Monomers. Through it, the company produces products such as rheology modifiers, acrylic binders, foam cell promoters, acrylic resin, and more. These ultimately find their way into architectural paints and coatings, industrial coatings and paper, adhesives, inks, and other related offerings. The other unit, meanwhile, is called Consumer Solutions, and it is responsible for the production of adhesives and sealants, antifoams and surfactants, and other related offerings. And uses here include the personal care and home care markets, industrial and chemical processing, consumer and electronics goods, and more. During the company’s 2021 fiscal year, this segment accounted for 17.6% of its revenue and 8.8% of its profits. The remaining 0.5% of revenue is attributable to the firm’s Corporate operations. Under this umbrella is included non-business aligned joint ventures, non-business aligned litigation expenses, and discontinued or non-aligned businesses. It should come as no surprise that this unit generated a loss last year, with that loss coming in at $253 million.

Dow Inc Historical Financials

Author – SEC EDGAR Data

Over the past few years, the fundamental picture for Dow has been rather mixed. Revenue rose from $43.73 billion in 2017 to $49.60 billion in 2018 before plunging over two years to just $38.54 billion in 2020. The good news for investors is at 2021 proved to be a great year, with revenue soaring to $54.97 billion. Across the board, the company benefited from a 40% increase in local price and product mix, as well as from a 1% increase in volume. That growth has continued into the company’s 2022 fiscal year. In the first quarter of the year, the only quarter for which data is currently available, sales totaled $15.26 billion. That is 28.5% higher than the $11.88 billion the company reported one year earlier. It’s also worth noting that this sales level was $724.38 million above what analysts anticipated. During the quarter, volume for the company’s products grew by 3%, though the company was affected by unfavorable currency fluctuations to the tune of 3%. The real drive, then, was a 28% increase in pricing on its products. Management chalked this up to tight supply and demand dynamics, as well as the passing through of higher raw material prices.

Dow inc Q1 2022 Financials

Author – SEC EDGAR Data

When it comes to profitability, Dow has been rather volatile. The business generated net losses in two of the past three years, but the profit of $6.41 billion in 2021 dwarfed all of the results achieved in prior years. More consistent than profits have been cash flows. After generating a net outflow of $6.44 billion in 2017, the company steadily grew its cash flow between 2018 and 2021, with that metric rising from $3.10 billion to $7.07 billion. If we adjust for changes in working capital, the picture was fairly consistent between 2017 and 2020, with a low point of $4.75 billion and a high point of $5.33 billion. Then, in 2020, the company saw its operating cash flow surge to $8.52 billion. Over that same window of time, EBITDA also fluctuated wildly, ranging from a low point in the past five years of $5.59 billion to a high point of $12.38 billion. That high point was in 2021.

Due to the higher pricing of its products, strong bottom-line results have continued into the 2022 fiscal year. Net profits in the first quarter of the year came in at $1.57 billion. That compares to the $991 million generated one year earlier. On a per-share basis, the company generated profits of $2.11. On an adjusted basis, that figure was $2.34. By comparison, analysts were anticipating profits per share of just $1.95. So the company handily beat expectations there. Operating cash flow went from a negative $228 million to a positive $1.61 billion. If we adjust for changes in working capital, it would have risen from $800 million to $3.20 billion. And meanwhile, EBITDA for the company expanded from $2.27 billion to $3.17 billion. For the company’s 2022 fiscal year, the Company did not provide any guidance. But if we annualize the EBITDA figure and apply that same growth rate to operating cash flow, we should get EBITDA of $17.28 billion and operating cash flow of $11.89 billion.

DOW stock Trading Multiples

Author – SEC EDGAR Data

When it comes to pricing the company, the overall process is pretty simple. Using our projected 2022 figures, the business is trading at a price to adjusted operating cash flow multiple of 4.1. This compares to the 5.8 figure that we get if we rely on 2021 results. Meanwhile, the EV to EBITDA multiple should be 3.5. That compares to the 4.9 we get if we rely on 2021 results. At first glance, the company looks extremely cheap here. Having said that, investors should not assume that the current environment will remain this way forever. Eventually, inflation will either pull back or costs will catch up to the company. A better way to value the business is to assume that financial results revert back to what we saw in 2019, before the pandemic arose. Even in this case, however, shares look quite attractive. The price to adjusted operating cash flow multiple would be 9.3 and the EV to EBITDA multiple is 8.4. To put the pricing of the company into perspective, I decided to compare it to five similar firms. Using the 2021 results, these companies range from a low of 2.4 to a high of 15.9 if we focus on the price to operating cash flow method. Three of the five companies were cheaper than Dow. Instead, using the EV to EBITDA approach, the ranges from 2.7 to 9.8. In this case, two of the five companies were cheaper than our target.

Company Price / Operating Cash Flow EV / EBITDA
Dow 5.8 4.9
LyondellBasell Industrial N.V. (LYB) 4.7 5.4
Westlake Corporation (WLK) 6.9 5.6
Olin Corporation (OLN) 5.2 4.7
Braskem S.A. (BAK) 2.4 2.7
Valvoline (VVV) 15.9 9.8

Takeaway

Right now, things are going extremely well for Dow. Having said that, I do not expect current market conditions to be the new normal. But even if my prediction comes to pass, shares look quite cheap on an absolute basis. Because of this, I do believe the business has upside potential for the long haul, but only for investors who don’t mind some volatility from year to year. There’s also the fact that management is currently rewarding shareholders handsomely. On April 13th, for instance, the company announced a new $3 billion share buyback program. This is in addition to the $775 million the company still has to work with under its old buyback plan. That particular plan, management expects to use up by the middle of 2022. Given how attractive shares are, management buying back stock with excess cash flow sounds like a good idea to me that should ultimately create value for the company’s shareholders in the long run. This further adds to my positive sentiment on the business, ultimately leading me to rate it a ‘buy’ opportunity.