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Here's Why You Should Hold Onto Dow (DOW) Stock for Now

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Dow Inc. (DOW - Free Report) is expected to benefit from cost synergy savings and productivity initiatives and investment in high-return projects amid headwinds including soft demand in certain end-use markets.

The company’s shares are down 22.5% year to date compared with a 13.1% decline recorded by its industry.


 

Let’s find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.

What’s Favoring DOW?

Dow remains committed to invest in attractive areas through highly accretive projects. It is investing in several high-return growth projects including the expansion of downstream silicones capacity. The company completed 16 silicones incremental expansion projects last year, which provided additional downstream capability.

The company should also gain from cost synergy savings and productivity actions. It focuses on maintaining cost and operational discipline through cost synergy as well as stranded cost-removal initiatives.

Dow delivered more than $600 million in cost synergy and stranded costs savings in 2019. It also realized more than $30 million of savings from stranded cost removal in the first quarter of 2020. The company expects to complete stranded costs removal target in 2020 and capture around $140 million of savings. Dow is also taking actions to cut operating expenses by $350 million, which is expected to lend support to its earnings in 2020.

Moreover, Dow is committed to return value to its shareholders by leveraging healthy cash flows. Dow generated strong operating cash flows from continuing operations of $1.2 billion in the first quarter. It returned $643 million ($518 million in dividend and $125 million in share buybacks) to its shareholders in the quarter. Dow is also taking actions to further strengthen its financial position.

A Few Headwinds

Weak demand is hurting Dow’s volumes in certain regions, as witnessed in the last-reported quarter. Demand across certain key industrial segment remains soft amid the coronavirus pandemic. The company is seeing softer demand in automotive, consumer durable and construction end markets. Slowing global economic activities is affecting demand as buyers remain cautious amid the pandemic. Weak demand is expected to continue to put pressure on volumes and the company’s top line in the second quarter of 2020.

Moreover, Dow is exposed to pricing pressure due to lower global energy prices. The company saw lower selling prices for its products in the first quarter, hurting its revenues. The sharp decline in crude oil prices hurt the company’s selling prices. Prices are expected to remain under pressure in the second quarter amid lower energy prices. This is likely to weigh on the company’s top line in the quarter.

The company also faces challenges from lower equity earnings from joint ventures in the second quarter. It sees an unfavorable impact of around $25 million in the quarter in its Packaging & Specialty Plastics unit. Another $50 million headwind is expected in the Industrial Intermediates & Infrastructure segment. This is likely to hurt margins in these segments.
 

Dow Inc. Price and Consensus

 

Dow Inc. Price and Consensus

Dow Inc. price-consensus-chart | Dow Inc. Quote

 

Stocks to Consider

Better-ranked stocks worth considering in the basic materials space include Royal Gold, Inc. (RGLD - Free Report) , Sandstorm Gold Ltd (SAND - Free Report) and Harmony Gold Mining Company Limited (HMY - Free Report) .

Royal Gold has a projected earnings growth rate of 62.1% for the current year. The company’s shares have gained around 15% in a year. It currently has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sandstorm Gold has a projected earnings growth rate of 55.6% for the current year. The company’s shares have rallied roughly 72% in a year. It currently carries a Zacks Rank #2 (Buy).

Harmony Gold has an expected earnings growth rate of 264.3% for the current fiscal year. The company’s shares have shot up around 158% in the past year. It presently carries a Zacks Rank #2.

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