Bank of America downgrades Dow stock to 'neutral'

03 October 2006 14:58  [Source: ICIS news]

HOUSTON (ICIS news)--Bank of America on Tuesday downgraded Dow Chemical to a "neutral" from a "buy" rating while keeping a $41/share target price.

In a report, the bank noted several reasons for the downgrade: the outlook for specialty chemicals is mixed, commodity chemicals face a near-term peak, Dow is reluctant to accelerate share repurchases, the bank holds a cautious outlook for crop protection chemicals, and the company may be overvalued.

The bank said Dow's shares have lagged so far this year but since the second quarter have rebounded 16% versus 5% for the Standard & Poor's 500 index.

"Our estimate reduction reflects lower forecast profitability in Dow’s performance businesses due to outages, light volumes, and pricing pressure in selected product lines such as latex and acrylic monomers," the bank said.

It added that ethylene margin erosion appears likely in the fourth quarter. The bank said ethylene producers like Dow benefited in September from declining feedstock and energy costs and numerous industry outages.

It said Dow's reluctance to accelerate share repurchases may signal the company intents to acquire specialty chemicals businesses. "While we must judge each potential deal on its merits, we see acquisition of 'true' specialties as a rocky road to value creation," the bank said, noting that specialty properties trade higher than eight times earnings before interest, taxes, depreciation and amortisation (EBITDA) while Dow shares trade for 5.7 times 2006 EBITDA.

By: Patrick Crow
+1 713 525 2653

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