DOW Trying to Pass Along Costs

We rate Dow Chemical (DOW - Analyst Report) a Hold as high raw material cost forced the company to temporarily idle or reduce production at a number of its manufacturing plants. Further, DOW has a 67% exposure to the commodity chemical cycle. We expect earnings to remain under pressure. We set a target of $37.50, which is 10.9x our 2008 estimate.

However, the company’s costs are low due to vertical integration and its financials are solid. Stronger demand in Europe, Asia Pacific, Latin America, India, Middle East and Africa has more than offset the continued economic slowdown in North America. Moreover, price gains have largely offset significant increases in feedstock and energy costs.

Dow maintains its strategy to reduce earnings cyclicality and improve earnings growth by increasing investment in the Performance businesses, maintaining integration with the Basics businesses and growing the Basics businesses through cost-advantaged joint ventures.

On June 24, Dow announced a second round of price hikes of 25% this year, which will come into effect in July. With effect from August 2008, the company will also levy a freight surcharge of $300 per shipment by truck and $600 per shipment by rail. The company plans to implement freight surcharges in other geographic regions in the next half of 2008. Dow also plans to cut production of some of its products due to soaring energy prices.

Read the full analyst report on DOW