Dow vs. DuPont de Nemours: Which Chemicals Stock is a Better Buy?

Dow Inc. (DOW) provides various materials science solutions for consumer care, infrastructure, and packaging markets. It operates through Packaging & Specialty Plastics; Industrial Intermediates & Infrastructure; and Performance Materials and Coatings segments. On the other hand, DuPont de Nemours, Inc. (DD) provides technology-based materials, ingredients, and solutions. It operates in three segments: Electronics & Imaging; Transportation & Advanced Polymers; and Safety & Construction.

Despite concerns related to carbon emissions and supply chain crisis, the recovery of the chemical industry has been primarily driven by high demand for substances like plastics and methanol, according to the International Energy Agency (IEA). The chemical industry is one of the United States' largest manufacturing industries, serving a sizable domestic market and an expanding global market. The demand for chemicals is expected to increase in the upcoming months, with the reopening of the economy leading to the rising use of chemicals in major end-markets such as packaging, automotive, and construction. Therefore, both DOW and DD should benefit.

DD has gained 4.7% over the past three months, while DOW has delivered negative returns. Also, DD’s 6.2% gains year-to-date are higher than DOW’s negative returns. Moreover, DD is the clear winner with 17.6% gains versus DOW’s negative returns in terms of the past year’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 6, 2021, DOW announced its plan to build the world's first net-zero carbon emissions integrated ethylene cracker and derivatives site with respect to scope 1 and 2 carbon dioxide emissions. DOW’s Chairman and CEO Jim Fitterling said, "Our advantaged position and disciplined approach to capital investment makes us well-positioned to lead the industry in decarbonizing, growing and accelerating Dow's path toward carbon neutrality."

On November 2, 2021, DD announced a series of actions advancing its strategy as a premier multi-industrial company focused on market-leading high-growth, high-margin businesses with complementary technology and financial characteristics. The company has entered into a definitive agreement to acquire Rogers Corporation (ROG) for $5.20 billion and announced its intent to divest a substantial portion of its Mobility & Materials segment.

Recent Financial Results

DOW’s net sales increased 53% year-over-year to $14.80 billion for the fiscal third quarter ended September 30, 2021. The company’s operating EBITDA grew 143.2% year-over-year to $3.61 billion, while its net income came in at $1.71 billion compared to a loss of $1 million in the prior-year quarter. Also, its operating EPS came in at $2.75, up 450% year-over-year.

DD’s net sales increased 18% year-over-year to $4.30 billion for the fiscal third quarter ended September 30, 2021. The company’s operating EBITDA grew 20% year-over-year to $1.09 billion, while its net income came in at $433 million representing a 403.5% year-over-year increase. Also, its adjusted EPS came in at $1.15, up 89% year-over-year.

Expected Financial Performance

Analysts expect DOW’s revenue to increase 34.4% for the quarter ending December 31, 2021, and 42.2% in fiscal 2021. The company’s EPS is expected to grow 165.4% for the quarter ending December 31, 2021, and 439.8% in fiscal 2021. Moreover, its EPS is expected to grow at 56% per annum over the next five years.

On the other hand, DD’s revenue is expected to decrease 20.6% for the quarter ending December 31, 2021, and 19.1% in fiscal 2021. However, its EPS is expected to grow 57.1% for the quarter ending December 31, 2021, and 94.6% in fiscal 2021. Also, the company’s EPS is expected to grow at a rate of 13.7% per annum over the next five years.

Profitability

DOW’s trailing-12-month revenue is 2.31 times what DD generates. DOW is also more profitable with an EBIT margin of 14.03% compare to DD’s 11.30%.

Furthermore, DOW’s ROE, ROA, and ROTC of 39.37%, 7.40%, and 13.61% are higher than DD’s 4.64%, 2.65%, and 3.10%, respectively.

Valuation

In terms of forward non-GAAP P/E, DD is currently trading at 17.94x, 203% higher than DOW’s 5.92x. Moreover, DD’s forward non-GAAP PEG ratio of 1.31x is 1,090.9% higher than DOW’s 0.11x.

So, DOW is relatively affordable here.

POWR Ratings

DOW has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, DD has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

DOW has an A grade for Value, consistent with its forward non-GAAP PEG of 0.11x, 91% lower than the industry average of 1.17x. However, DD has a C grade for Value, in sync with its non-GAAP PEG of 1.31x, 11.8% higher than the industry average of 1.17x.

Moreover, DOW has a grade of B for Quality. This is justified given DOW's 27.95% trailing-12-month ROCE, 236.9% higher than the industry average of 11.93%. On the other hand, DD has a Quality grade of C, in sync with its 4.62% trailing-12-month ROCE, 61.3% lower than the industry average of 11.93%.

Of the 90 stocks in the A-rated Chemicals industry, DOW is ranked #32. In comparison, DD is ranked #58.

Beyond what I’ve stated above, we have also rated the stocks for Momentum, Growth, Stability, and Sentiment. Click here to view all the DOW ratings. Also, get all the DD ratings here.

The Winner

The chemical industry is expected to grow in the upcoming months with increasing demand. While DOW and DD are expected to gain, it is better to bet on DOW now because of its lower valuation, higher profitability, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Chemicals industry here.

DOW shares rose $0.12 (+0.22%) in after-hours trading Monday. Year-to-date, DOW has gained 1.46%, versus a 23.91% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

More...