Dow Inc. (DOW Quick QuoteDOW - Free Report) is expected to gain from cost and productivity actions and investment in high-return projects. However, it faces headwinds from soft demand due to weak global economic activities.

The company’s shares are down 4.4% over a year, compared with a 16.8% decline recorded by its industry.

Image Source: Zacks Investment Research

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

Cost and Growth Actions Aid DOW

Dow focuses on maintaining cost and operational discipline. The company is realizing a full $300 million EBITDA run rate benefit from restructuring programs being initiated in the third quarter of 2020. DOW is implementing targeted actions focused on optimizing labor and purchased service costs, lowering turnaround spending and boosting productivity. Its targeted actions delivered $1 billion in cost savings for full-year 2023. The company also expects its investment in digital initiatives to drive efficiency and allow it to realize $300 million EBITDA run rate by 2025.

Dow also remains focused on investing in attractive areas through highly accretive projects. It is investing in several high-return growth projects including the expansion of downstream silicones capacity.

Dow’s disciplined and balanced capital allocation priorities are also supporting its Decarbonize and Grow strategy to deliver long-term value creation for its shareholders. It is advancing its Decarbonize and Grow and Transform the Waste strategies, which are expected to deliver more than $3 billion in underlying earnings annually by 2030.

The company received a definitive green light from its Board in November 2023 for its Fort Saskatchewan Path2Zero initiative, marking a significant milestone in its commitment to building the world's inaugural net-zero Scope 1 and 2 emissions-integrated ethylene cracker and derivatives facility in Alberta, Canada.

The project involves the construction of a new ethylene cracker, a 2-million MTA polyethylene capacity expansion and retrofitting the existing cracker to achieve net-zero Scope 1 and 2 emissions. It is expected to generate $1 billion in EBITDA growth annually throughout the economic cycle and decarbonize 20% of Dow's global ethylene capacity.

The investment positions Dow to meet increasing demand in lucrative markets such as packaging, infrastructure and hygiene, with additional potential gains from the commercialization of low and zero-emission products.

Moreover, the company is committed to return value to its shareholders by leveraging healthy cash flows. It returned $2.6 billion to its shareholders in 2023 through dividends and share buybacks. Dow has adequate liquidity of roughly $13 billion and no substantial debt maturities until 2027.

Sot Demand a Concern

The company faces challenges from demand softness in Europe and Asia Pacific. Lower consumer spending amid inflationary pressures is affecting demand in Europe. Global industrial activities have been affected by the weaker demand recovery in China.

Inflationary pressures are impacting consumer durables and building and construction demand. Weak conditions across these markets are likely hurt volumes in first-quarter 2024. The company expects demand to remain pressured by elevated inflation, high interest rates and geopolitical tensions over the near term, notably in building and construction and durable goods markets.

Dow also faces headwinds from plant turnaround costs and outages in the first quarter. It sees a $50 million headwind from a planned maintenance activity in the quarter in the Industrial Intermediates & Infrastructure unit, mainly related to a PDH turnaround.

Also, a $50 million headwind is expected in the Packaging & Specialty Plastics unit due to higher planned maintenance activity at certain energy assets in the U.S. Gulf Coast. Higher planned maintenance turnaround at Deer Park acrylic monomers site and PDH is expected to lead to another $50 million headwind in the Performance Materials & Coatings unit in the first quarter.

Stocks to Consider

Better-ranked stocks worth a look in the basic materials space include, Carpenter Technology Corporation (CRS Quick QuoteCRS - Free Report) , Alpha Metallurgical Resources Inc. (AMR Quick QuoteAMR - Free Report) and Hawkins, Inc. (HWKN Quick QuoteHWKN - Free Report) .

The consensus estimate for Carpenter Technology’s current fiscal year earnings is pegged at $4.00, indicating a year-over-year surge of 250.9%. CRS beat the Zacks Consensus Estimate in three of the last four quarters while matching it once, with the average earnings surprise being 12.2%. The company’s shares have gained around 27% in the past year. CRS currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Alpha Metallurgical Resources’ current-year earnings has been revised upward by 8.8% in the past 60 days. It currently carries a Zacks Rank #1. AMR delivered a trailing four-quarter earnings surprise of roughly 9.6%, on average. AMR shares are up around 108% in a year.

The consensus estimate for Hawkins’ current fiscal year earnings is pegged at $3.61 per share, indicating a year-over-year rise of 26.2%. The Zacks Consensus Estimate for HWKN’s current-year earnings has been revised 4.3% upward in the past 30 days. HWKN, a Zacks Rank #2 (Buy) stock, beat the consensus estimate in each of the last four quarters, with the average earnings surprise being 30.6%. The company’s shares have rallied roughly 64% in the past year.