Dow Still Setting The Pace
In order to expand its specialty business, Dow Chemical (DOW) would takeover Rohm and Haas (ROH). This will consolidate the chemical producer's higher-margin and higher-growth specialty businesses and reduce the volatility in earnings and cash flow.
However, high raw material costs have forced the company to temporarily idle or reduce production at several of its plants. Further, Dow has a high exposure to the commodity chemical cycle. We expect earnings to remain under pressure and rate the stock a Hold with a target of $35.00.
On a consolidated basis, the growth rate of the combined portfolio over 2008-2012 is expected to be between 5% and 7%. The merger is likely to boost DOW's earnings by 5% in 2010 and 13% in 2011. Dow will retain investment-grade credit ratings after the transaction, with a total debt-to-capital ratio of less than 40%. After the Rohm and Haas acquisition and the joint venture with Petrochemical Industries Company of Kuwait (PIC), Dow will generate about 69% of its total revenues from the performance products and advanced material division.
On July 24, Dow reported second quarter 2008 results. Earnings for the quarter were $0.81 per share, compared with earnings per share of $1.07 in the same quarter last year. Sales for the second quarter set another company record, rising 23% from the same period last year to $16.4 billion. Double-digit price increases were recorded in all operating segments and all geographic areas. Volume grew 5%, with 12% growth in geographic areas outside of North America, including an 11% volume increase in Europe.
Estée Lauder Still Looking Good
Despite a slowdown in consumer spending in the U.S., earnings for
Estée Lauder Companies (
EL) are expected to increase 9.7% this fiscal year. With the stock trading at the low-end of the historical valuation range, we maintain the Buy rating with a price target of $56.25.
The management is focused on delivering sales and earnings growth by through innovative and cutting-edge products in the skin care, makeup, fragrance, and hair care categories. Estee Lauder has solid long-term growth prospects in view of its market presence and brand equity. Positive cash flow has allowed management to return value to shareholders through share repurchases and dividends.
