Dow Chemical Approaching Its Peak

Higher oil prices may be making traders on Wall Street nervous, but Dow Chemical (DOW - commentary - Cramer's Take) -- one of the world's largest consumers of feedstock -- seems to be handling it pretty well.

Not that Dow is exactly thrilled about the idea of $50-per-barrel oil. Indeed, at the company's triennial analyst meeting last Thursday, CEO designate Andrew Liveris, a 28-year Dow veteran who officially takes charge Nov. 1, said the company is assuming that high feedstock costs "will be a permanent part of the landscape for at least the foreseeable future."

But that challenging reality didn't stop Dow from hosting one of its most bullish meetings ever. Thanks to what Chairman Bill Stavropoulos called a "single-minded focus to improve our financials," Dow appears headed toward peak earnings of $6 per share, achievable sometime in the next few years. "Whatever the world could throw at us, we have the strategy to maximize the company's performance," Stavropoulos said.

Even so, the fear that high oil and gas prices will take a bite out of Dow's results (and affect the economy overall) has kept the shares from reaching their full potential. Indeed, Dow's stock is trading at a price-to-earnings ratio of just 12 times the 2005 consensus estimate of $3.50 for 2005, well below its cycle average of 15. Not only that, the current price is just 6.8 times the company's target for peak earnings per share. Typically, Dow shares have traded at a forward P/E multiple of 10 times peak earnings, which is how some analysts derive price targets of around $50 for the stock. Dow's current yield of more than 3% also helps.

With leaders like Stavropoulos and Liveris at the helm, Dow is one of best-managed chemical companies out there, if not the best -- besides being the world's largest. Take the company's approach to the higher hydrocarbon cost issue, for instance. Dow's ability to manage the tremendous headwind this year has been impressive. Indeed, despite $720 million, or more than 50 cents per share, in higher feedstock and energy costs in the first half of this year vs. last year, Dow's earnings per share were 69 cents per share better. Stavropoulos credited the company's conservation efforts: In the last 10 years, Dow has reduced its energy consumption per pound of product produced by 44% (a 5.4% reduction came in the first half of this year), avoiding $2.7 billion in cumulative costs.

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Odette Galli is a freelance columnist for RealMoney.com. She has been a writer at SmartMoney Magazine and a senior manager at Ark Asset Management, where she co-managed $3 billion in institutional assets. In addition, Galli was a senior vice president at J & W Seligman. At the time of publication, she had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. She welcomes your feedback and invites you to send your comments to [e-mail].