Rothschild Redburn upgrades Dow stock to Buy on polyethylene recovery potential

Investing.com - Rothschild Redburn upgraded Dow Inc. (NYSE:DOW) from Neutral to Buy on Tuesday, while revising its price target to $40.00 from $65.00. The stock, currently trading near its 52-week low of $21.31, has seen a significant decline of over 40% in the past six months.

The upgrade comes as the research firm sees "relatively higher cyclical upside potential" for Dow compared to Lyondell, based on expectations that polyethylene margins will recover while polypropylene remains at an extended trough. According to InvestingPro data, technical indicators suggest the stock is currently in oversold territory.

Rothschild Redburn highlighted that Dow’s recent dividend cut has reset capital allocation, providing flexibility to create value through debt repayment and the introduction of a more opportunistic share buyback program that would be "highly accretive at the current share price." Despite the recent cut, the stock still offers a substantial 6.48% dividend yield.

The firm noted that Dow shares are currently trading at a trough free cash flow-based valuation and well below mid-cycle and replacement cost levels, creating what it describes as an "attractive" risk/reward profile.

Rothschild Redburn’s new price target is based on revised mid-cycle earnings of $5.7 billion for the chemical company.

In other recent news, Dow Inc. announced a 50% reduction in its quarterly dividend, setting it at 35 cents per share. This decision was attributed to a persistently challenging macroeconomic environment and a prolonged industry downturn. Fitch Ratings downgraded Dow Inc.’s Long-Term Issuer Default Rating to ’BBB’ from ’BBB+’ with a Stable outlook, citing weak operating performance and high leverage due to soft demand in construction and automotive sectors. Evercore ISI also downgraded Dow’s stock to In Line from Outperform, reducing its price target to $32.00, raising concerns about the company’s outlook following the dividend cut.

Meanwhile, BMO Capital lowered its price target for Dow to $20.00, maintaining an Underperform rating, pointing to a weak petrochemical market environment. RBC Capital also adjusted its price target downward to $26.00, maintaining a Sector Perform rating, expressing skepticism about Dow’s optimistic polyethylene price assumptions. These developments reflect ongoing challenges for Dow Inc. in navigating a difficult market landscape.

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