We have discussed in several recent reports the very mixed fortunes in the intermediate and specialty chemical sector related to whether companies have been able to move prices fast enough to cover costs. The two large blue bars in the AkzoNobel chart below show that Akzo was close, but did not make it. We expect other examples like this over the coming weeks but we also expect some companies to have done better – some of this depends on mix and contract terms, but a lot has to do with how early you acted on the rising cost trend and how aggressive you were willing to be with customers. Dow is another example of a company struggling to get pricing high enough to cover cost increases, although Dow and others have aggressive price increase announcements in the market for polyethylene for April and May that would make a significant difference to US margins if successful.
Source: AkzoNobel – 1Q22 Results Presentation, April 2022
We will focus on Dow’s benchmarking analysis in our Sunday Thematic, as we see it as a sign of (justified) frustration at the company that its near “best in class” performance is not reflected in relative stock valuation. We could be critical of Dow’s peer group choice, but there are no direct comps for most chemical companies as everyone’s business mix is different. The more logical comparison is LyondellBasell, but the overlap stops at polyethylene and polyurethanes and even these businesses are quite distinct. We do see Dow as close to best in class on many levels and we would likely draw the same conclusion that the company has, which is that buying back stock at the current dividend yield and free cash flow yield is likely a very good investment. On Sunday we will focus more broadly on take private options for several industries. See today's daily report for more.
Source: Dow 2021 Annual Benchmarking Presentation – Published April 21, 2022, April 2022
