Shares of Dow Inc. dropped Monday, after KeyBanc Capital analyst Aleksey Yefremov turned bearish on the chemicals and specialty materials company, citing concerns that the “meaningful” exposure to commodities and Europe skews the risk-versus-reward profile to the downside.
Dow’s stock DOW, -1.17% fell as much as 3.5% intraday, before paring losses to lose 1.0% in afternoon trading.
Yefremov cut his rating on the Michigan-based 125-year-old company to underweight from sector weight, saying a “petrochemical recession is likely upon us.” He set a stock price target of $ 45, which implies about 17% downside from current levels.
Following discussions with consultants and companies, he cut his third-quarter estimate for earnings per share to $ 1.40 from $ 1.69, and his 2022 EPS estimate to $ 7.10 from $ 7.72. That compares with the FactSet EPS consensus estimates of $ 1.75 for the third quarter and $ 7.99 for the year.
Yefremov said producers like Dow are facing higher energy costs, not only in Europe, but in the U.S. to a lesser degree. And coupled with improving supply and falling global demand, he expects margins to suffer.
“We see short-term risk/reward for names with meaningful commodity and European exposure skewed to the downside,” Yefremov wrote in a note to clients. “We expect 4Q22 margins and earnings to approach ‘trough’ or ‘recession’ levels, while we move to sub-normalized 2023 estimates.”
Yefremov’s new bearish stance comes after Dow Jones Newswires reported last week that Dow told its customers that it would temporarily reduce polyethylene (PE) operating rates by 15%.
He believes Dow peers LyondellBasell Industries N.V. LYB, -0.56% and Westlake Corp. WLK, -3.25% will follow with their own PE production cuts, and also downgraded both companies to underweight from sector weight.
“We believe this largely has to do with weakening demand in PE markets, but also logistical constraints,” Yefremov wrote. “Additionally, we see downside in PVC [polyvinyl chloride] where domestic prices are likely to follow exports lower. All of this before potential power shortages in Europe this winter.”
Shares of Dow have tumbled 21.9% over the past three months, while LyondellBasell shares have sunk 26.1% and Westlake’s stock has dropped 21.4%. In comparison, the Dow Jones Industrial Average DJIA, -0.18% has declined 2.9%.