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May 28, 2010
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The rating agency foresees recovering demand for Dow’s products in the emerging markets, especially in Asia and Latin America. However, Fitch is skeptic about any significant improvement in demand for the company’s products in the mature markets, where growth remains slow. As such, Fitch expects modest improvement in Dow's revenues and profits in 2010.
With respect to Dow’s debt structure, Fitch showed concerns over the highly leveraged balance sheet. Although Dow has fully offloaded its $9.2 billion bridge loan related to the Rohm & Haas (“ROH") acquisition in 2009, its debt-to-capitalization ratio hovers around 50%. The rating agency also noted Dow’s weak operating cash flow as a constraint to growth.
However, Fitch is positive on Dow’s integrated production structure, which helps the company’s cost synergies. In its recent release, Dow has announced to achieve the ROH acquisition as well as other restructuring activities to result in cost synergies of $2.5 billion in 2010. The company recorded cost savings of $1.7 billion last year.
Dow has projected a 10% growth in revenues annually in its Advanced Materials division. The company expects profitability to improve with improving end-market conditions and a lower fixed cost base. Dow also plans to invest in a new Dow Coating Materials emulsion plant in eastern China, and expand Dow Water & Process Solutions facility in Fombio, Italy, to manufacture copolymers.
Joint ventures and acquisitions are an integral part of Dow’s growth strategy. These provide access to potential markets, new technologies and feedstock, while at the same time lowering capital investment and risk. Dow is targeting an acquisition growth synergy run-rate of $2 billion by the end of 2012.
We have upgraded Dow to Outperform from our previous Neutral recommendation.
Read the full analyst report on "DOW"
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