Dow Chemical's Target Price Cut 36% by Bank of America Amid Global Challenges

Dow Chemical, a prominent chemical company, is facing a "perfect storm" of challenges that have led to a significant reduction in its target price by Bank of America. The bank's analysts downgraded the company's rating from "buy" to "underperform" and slashed the target price from $44 to $28. The analysts cited a combination of weak global demand, rising trade barriers, and increasing raw material costs as factors eroding the company's profitability and putting its dividend at risk.

Since the U.S. announced comprehensive tariffs on April 2, Dow Chemical's stock has declined by 19%. Despite the sell-off, the bank's analyst Steve Byrne noted that the stock's valuation no longer appears attractive given the delayed recovery and worsening financial outlook. The most pressing issue is Dow Chemical's annual dividend of $2 billion. Based on revised earnings and cash flow projections, Bank of America estimates a free cash flow shortfall of $2.6 billion for 2025 and 2026, more than double the previous forecast. This puts increasing pressure on Dow Chemical's ability to maintain its dividend, especially by 2027 when the company's net leverage ratio is expected to rise to nearly three times.

Dow Chemical has significant exposure to cyclical industries such as housing, construction, and automotive, making it vulnerable to global economic downturns. While about 30% of its revenue comes from the relatively stable packaging market, the company is also a major exporter of polyethylene, which accounts for 40%-50% of its sales. The imposition of high tariffs on U.S. polyethylene by China adds another layer of uncertainty.

However, Bank of America pointed out a potential mitigating factor: U.S. raw material costs are expected to decline due to weak global demand and reduced exports. Nevertheless, this tailwind is not expected to be strong enough to offset the broader profit pressures.

Bank of America has significantly lowered its earnings expectations for the company, predicting a more modest increase in U.S. polyethylene prices followed by a decline later this year due to oversupply and weak demand. The bank now forecasts Dow Chemical's 2025 EBITDA at $4.77 billion, down from the previous $5.85 billion, and 2026 EBITDA at $5.42 billion, down from $7.04 billion.

Consequently, Bank of America reduced its enterprise value to EBITDA multiple valuation for Dow Chemical from 8x to 7.5x and lowered the target stock price from $44 to $28. The bank advised that due to the increased risk and slower earnings recovery, investors might find better opportunities in other areas of the chemical sector.