Dow vs. Huntsman: Which Chemical Stock is a Better Buy?

Dow Inc. (DOW) in Midland, Mich., 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. In comparison, Huntsman Corporation (HUN) in Salt Lake City, Utah, manufactures and sells differentiated organic chemical products worldwide. The company operates in four segments: Polyurethanes; Performance Products; Advanced Materials; and Textile Effects.

The chemical industry is one of the United States' largest manufacturing industries, serving a sizable domestic market and an expanding global market. Despite concerns related to carbon emissions, supply chain issues, and high raw material costs, the chemical industry’s recovery has been primarily driven by strong demand for both commodity and specialty chemicals. Furthermore, the increasing use of chemicals with the reopening economy in significant-end markets, such as automotive and construction, is expected to boost the chemical industry's growth in the coming months. According to a Verified Market Research report, the global specialty chemicals market is expected to grow at a 6.2% CAGR through 2028. Therefore, both DOW and HUN should benefit.

Over the past month, DOW’s shares have gained 5.3% in price, while HUN has returned 2.7%. However, HUN’s 10% gains over the past three months are higher than DOW’s 6.7% returns. Moreover, HUN is the clear winner with 35.6% gains versus DOW’s 15.1% returns in terms of their past year’s performance.

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

Latest Developments

On Oct. 6, 2021, DOW announced its plan to build the world's first net-zero carbon emissions integrated ethylene cracker and derivatives site concerning 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 Dec. 28, 2021, HUN announced two significant corporate initiatives: a review of strategic options for its Textile Effects Division, and a multi-year compensation plan. Peter R. Huntsman, Chairman, President, and CEO of HUN, said, "We have been transparent about our continued evaluation of divestment opportunities that are both in line with our strategic goals and in the best interests of our shareholders."

Recent Financial Results

DOW’s net sales increased 53% year-over-year to $14.80 billion for the fiscal third quarter, ended Sept. 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, versus a $1 million loss in the prior-year quarter. Also, its operating EPS came in at $2.75, up 450% year-over-year.

HUN’s revenues increased 51.3% year-over-year to $2.29 billion for its fiscal third quarter, ended Sept. 30, 2021. The company’s adjusted EBITDA grew 97.3% year-over-year to $371 million, while its adjusted net income came in at $239 million, representing a 241.4% year-over-year increase. Also, its adjusted EPS was $1.08, up 237.5% year-over-year.

Past and Expected Financial Performance

DOW’s EPS has grown at a 30.7% CAGR over the past three years. Analysts expect DOW’s revenue to increase 17.9% for the quarter ending March 31, 2022 but decrease 1.3% in fiscal 2022. The company’s EPS is expected to grow 39.7% for the quarter ending March 31, 2022 but decline 25.9% in fiscal 2022. Also, its EPS is expected to grow at 56.8% per annum rate over the next five years.

In comparison, HUN’s EPS has grown at an 18.3% CAGR over the past three years. The company’s revenue is expected to increase 10.8% for the quarter ending March 31, 2022, and 3.9% in fiscal 2022. Its EPS is expected to grow 27.3% for the quarter ending March 31, 2022, and 9.2% in fiscal 2022. Also, HUN’s EPS is expected to grow at an 11.4% rate  per annum over the next five years.

Profitability

DOW’s trailing-12-month revenue is 7.04 times HUN’s. DOW is also more profitable, with EBITDA and net income margins of 19.94% and 11.48%, respectively, versus  HUN’s 13.25% and 10.12%.

Furthermore, DOW’s 40.35%, 8.15%, and 15.12% respective ROE, ROA, and ROTC are higher than HUN’s 23.65%, 5.72%, and 7.99%.

Valuation

In terms of forward non-GAAP P/E, HUN is currently trading at 10.11x, which is 14.1% higher than DOW’s 8.86x. And HUN’s 7.06x forward EV/EBITDA ratio is 23.6% higher than DOW’s 5.71x.

So, DOW is relatively affordable here.

POWR Ratings

DOW has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, HUN has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

DOW has an A grade for Value, which is consistent with its 0.41x forward non-GAAP PEG. which is  66.7% lower than the 1.22x industry average. However, HUN has a B grade for Value,

Of the 90 stocks in the A-rated Chemicals industry, DOW is ranked #21. In comparison, HUN is ranked #54.

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

The Winner

The chemical industry is expected to grow in the coming months with increasing worldwide demand. While DOW and HUN are expected to benefit from the industry tailwinds, we think it is better to bet on DOW now because of its lower valuation and higher profitability.

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 were trading at $61.82 per share on Tuesday afternoon, up $2.09 (+3.50%). Year-to-date, DOW has gained 8.99%, versus a -4.93% 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.

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