So Barron’s did a mea culpa of sorts this week in finally admitting the Rohm & Haas deal was a good idea. But, in my humble opinion, they missed the most exciting part of the story.Here is the link to the full article:
IN ITS 112 YEARS, DOW CHEMICAL HAS SURVIVED numerous economic dislocations that shook management, decimated earnings and upended the company’s best-laid plans. But the recession of 2008-09 is different. Sure, it depressed the company’s profit, but Dow has emerged a bolder, stronger and better-balanced company than before, owing largely to its acquisition in April of specialty-chemicals maker Rohm & Haas.
When the deal was unveiled last summer, even Barron’s called it expensive (“A Questionable Chemical Romance,” July 14, 2008); it eventually cost Dow $16.2 billion. But you get what you pay for, as the saying goes. And in this case Midland, Mich.-based Dow acquired a business that will increase its exposure to high-margin specialty materials and decrease its reliance on lower-margin commodity products. That, plus the company’s growing investments in emerging markets and cost savings, will help Dow to exceed Wall Street’s profit expectations as the recession recedes, which in turn could help boost its shares, now trading at 27.48.
The story essentially reviews the Kuwait 11th hour pull out of a deal that officially ruined the Kuwaities reputation as a business partner, how shares suffered after that, how the company has moved away from basic plastics into performance chemicals and how there still may be a “culture clash” between Rohm & Hass holdovers and Dow folks.
Yawn….
They missed by not even mentioning the most exciting part of the business, Dow Ag. I know I have beat this drum relentlessly but that is because the market is not fully recognizing the value of Dow’s operating businesses.
Recent cooperative deals with both Monsanto (MON) for SmartStax and DuPont (DD) for Soybeans will further boost earnings for the unit already growing them >15% annually. This unit is strangely essentially ignored by the media in general. Unless for some reason there is going to be a whole lot less demand for food globally going forward, I am having a hard time seeing how this unit does not grow substantially.
Recent estimates put a $12B-$15B value on Dow Ag and its $7B of sales which then essentially places a $15B value on the rest of the company and its $60B of sales given today $30B market cap. Think about it, paying .4X sales for a company like Dow and getting a 2% dividend as a kicker.
Dow is at the base of the global economy. If there is a recovery globally (we know it is already happening in Asia and the Middle East as sales there have been very strong) Dow will benefit as they “make the stuff that people use to make stuff” for lack of a better phrase.
Is Dow a “deep value” now? No. Is was as recently as July at $14. But, for those investors looking for a good company that is well managed, pays a nice dividend and has plenty of room to run, Dow is your pick.
A word on the dividend. Given the dramatically improved outlook, and recent asset sales, it would be a nice time to gives some of what was cut because of the Kuwait deception last spring. Not a lot, but something to show it is going to eventually resume its growth.