Dow Worth $38 on Emerging Markets & Agricultural Demand

Dow Chemicals (NYSE:DOW) recently announced its Q3 earnings results that showed impressive revenue growth of 17 percent year over year (yoy), in part supported by price increases of 17 percent. Volumes in developed markets were weak in light of the sluggish economic environment in the U.S. and Europe, but emerging markets in Latin America and Asia Pacific helped pick up the slack, so volumes remained flat overall compared to last year. ^[1] Agriculture products also witnessed impressive growth in volumes, while volumes for most other divisions remained largely flat or declined. Population growth is one of the key drivers to agricultural demand, and we believe this provides support for Dow Chemicals’ stock in the future as well as for peers such as DuPont (NYSE:DD), BASF and 3M (NYSE:MMM).

We have a price estimate of $38.60 on Dow Chemicals’ stock, which is roughly 40% above the current market price.

See our full analysis for Dow Chemicals’ Stock.

Emerging markets offset weakness elsewhere

Dow’s business is largely driven by the demand for commodity and specialty chemicals, which are highly dependent on the health of the global economy. Despite fears of a slowdown, several recent announcements have supported the outlook for Dow’s business including recent new joint-ventures in the Middle East and Asia as well as new product announcements in the U.S. In addition, Dow has announced cost-cutting initiatives that will help ensure that it maintains its profitability even if the global economy slows further.

The continued weakness in the U.S. and Europe led to a drop in demand for major industrial products in the last quarter. This translated into Dow’s volumes declining 2% y-o-y in Europe and 3% y-o-y in North America.

Dow’s biggest focus in recent times has been on expanding its presence in emerging markets, which yielded nice results last quarter. Strong volume growth in countries like China, India and Brazil help offset the falling demand in North America and Western Europe. Latin American volumes grew 7% trailed by Asia Pacific at 5%.

But, going forward, demand for Dow’s products remain under threat if the economic environment deteriorates further. Weak economic growth in Western Europe and the U.S. will threaten economic growth in many export reliant emerging countries and so while Dow has been defensive, it is not immune to a sharp slowdown in developed western markets. Moreover, many emerging countries such as China and India are battling the inflationary pressures in their economy through monetary tightening which can stifle their economic growth in the medium term.

Population growth supports agricultural products demand

Last quarter, demand for Dow’s agricultural products continued its solid growth while demand most other Dow divisions remained weak. Population growth is one of the major drivers of increasing demand for food supplies, which in turn drives demand for Dow’s agricultural products. The world population, which hit the 7 billion mark recently, is expected to grow by another 2 billion by 2050, continuing to put enormous strain on basic necessities like food and water.

The U.N.’s Food and Agricultural Organization estimates that global food production will have to increase by 70 percent to support 2 billion more people by 2050. ^[2] Other factors fueling the demand for food supplies are high levels of global food prices and increasing wealth in emerging economies, which is causing increased demand for protein-rich food. ^[3]

We believe these factors will lead to fairly stable and strong demand for Dow’s agricultural products over the long term.

You can drag the trend lines in the modifiable charts above to see the impact of these trends on Dow’s stock value.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Dow Investor Relations: Pages 7 & 8 of Q3 2011 earnings slides [↩]
2. A crowded world’s population hits 7 billion [↩]
3. World Bank chief urges G20 to act on food prices [↩]