Shares of Dow Inc. (DOW) - Get Report were falling Friday after receiving downgrades from analysts at Deutsche Bank and Bernstein who are both concerned about slowing price momentum for polyethylene, which it produces.
Polyethylene is used in food and medical packaging and the thinking earlier in the year was that as the coronavirus pandemic got worse, prices for polyethylene would continue to climb.
Dow shares were falling 0.3% to $50.90 Friday morning; here is what Wall Street is saying.
Deutsche Bank (Buy rating downgraded to Hold, no PT)
We are downgrading Dow and Lyondell to Hold from Buy. With polyethylene price momentum having slowed, the rapidly growing focus on sustainability and climate change placing plastics directly in the crosshairs after a brief hiatus during the start of the pandemic and valuation no longer severely discounted following recent share price outperformance, we believe Dow and Lyondell shares will be rangebound in the near-to-medium term.
However, until there is further clarity i) on the depth and duration of the ethylene downturn and ii) when Dow and Lyondell will be viewed as part of the solution rather than part of the problem with respect to plastic waste and sustainability, we believe it will be difficult to broaden the shareholder bases of the two companies.
- David Begleiter
Bernstein (Outperform rating downgraded to Market Perform, PT raised to $57 from $49)
We are downgrading DOW and LYB to Market-Perform given that our COVID recovery thesis now has largely played out. In May, we argued that the polyethylene names will benefit from the supply/demand dislocation caused by increased demand from COVID-related food/medical packaging and decreased supply from plant shutdowns. Since the publication of our note, DOW has appreciated +43% and LYB + 30%. With PE pricing stalled out, however, we believe we have reached the end of the COVID demand boost.
Additionally, the wave of new Chinese capacity is coming online earlier than we expected, leading to oversupply in 2021, which will drive marginal producers' margin to zero.
- Jonas Oxgaard