Liveris’s Letter (DOW): A Bright Future

I read Liveris’s letter to shareholders today and have some immediate thoughts..

The press has been reporting Liveris’s compensation at $14.9 million but the reality is that only $1.5 million of that is salary, the rest is stock and loads of options that unless the share price turns around, are useless.

That being said, I actually like the fact he owns over 300,000 shares. It makes him one of the larger non-institutional individual shareholders (by far the largest of management) and does ensure that the decisions he makes today, are for the long term health of the company and by default, its share price.

In the letter, Liveris said “First, you can expect us to continue to run a tight ship. This is still a “no excuses” company, and we will manage our day-to-day business to deliver solid financial results. Dow people throughout the world have proven themselves capable of delivering what it takes to succeed.

Second, we will close on our joint venture with PIC and move forward with implementation of our asset-light strategy.

Third, we will continue transforming our earnings profile. I am committed that by the end of 2008 we will have taken another major step in that regard. If we do not find the right acquisition or acquisitions, we reserve the right to initiate a share buyback.

Either way, my commitment to our stockholders is that at the next industry trough, The Dow Chemical Company will have an earnings profi le that is well north of $3 per share and we will provide steady earnings growth beyond that point.”

What to think?

Liveris has been a straight shooter with shareholders since taking over and has yet to not deliver on a stated goal or objective. He has transformed the earnings profile and the upcoming PIC deal will forever alter the company for the better.

With equity earnings in 2007 over in excess of $1 billion for the first time, these JV’s, located in countries with access to cheap raw materials, will become the driver. The end of 2009 and 2010 will see many of the recent announcements come online that will expand this.

In one deal Dow will rid itself of having its fortunes tied to the highly cyclical commodities business and reap a windfall ($9.5 billion) that, based on to date evidence, will be used to reward shareholders.

Let’s not forget that when Liveris took over Dow was saddled with almost $12 billion in long term debt and was a pure commodity play. He has trimmed that debt load 36%, raised the dividend 25%, nearly doubled the cash from operations and made the aforementioned earnings profile change..

It is worth noting that despite the volatility in the earnings for the commodities side, and the explosion in raw material costs, earnings from the performance business grew 8% and the JV earnings have remained steady.

These two segments are Dow’s future and it is bright.

Now, the stock price……

Berkshire’s (BRK.A) Warren Buffett has always said that “price is what you pay, value is what you get”. It is one of my personal favorites because it reminds us that the price of a stock and what you are getting for that price are not always commensurate. There are times you pay in excess of what you are receiving in value and times you pay far less.

This is one of those times.

I have no idea what the price of Dow’s stock will be in the future. I do know that, buying the stock at its current levels, yielding a growing 4.5% is a wise move long term. With earnings expectations above $3.50 for 2010 (the next expected trough), Dow currently sits at about 10 times those earnings. Should Liveris’s “well north” mean $3.90 a share or higher, then we have a 4.5% yielding company sitting at 8 to 9 times earnings…

All this does not take into account the endless possibilities of $9.5 billion coming into the bank this year….

I will dig through the 10-k this week and see what I can find..

Disclosure (“none” means no position):Long Dow