Intrinsic value of Dow Chemical - DOW

Previous Close

$66.65

  Intrinsic Value

$138.77

stock screener

  Rating & Target

str. buy

+108%

  Value-price divergence*

+164%

Previous close

$66.65

 
Intrinsic value

$138.77

 
Up/down potential

+108%

 
Rating

str. buy

 
Value-price divergence*

+164%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of DOW stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 81.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -1.27
  15.70
  14.63
  13.67
  12.80
  12.02
  11.32
  10.69
  10.12
  9.61
  9.15
  8.73
  8.36
  8.02
  7.72
  7.45
  7.20
  6.98
  6.78
  6.61
  6.45
  6.30
  6.17
  6.05
  5.95
  5.85
  5.77
  5.69
  5.62
  5.56
  5.50
Revenue, $m
  48,158
  55,719
  63,870
  72,600
  81,893
  91,736
  102,119
  113,032
  124,469
  136,425
  148,902
  161,902
  175,433
  189,507
  204,136
  219,340
  235,139
  251,558
  268,625
  286,370
  304,828
  324,035
  344,030
  364,857
  386,560
  409,187
  432,790
  457,421
  483,138
  510,001
  538,071
Variable operating expenses, $m
 
  43,890
  50,087
  56,724
  63,789
  71,273
  79,167
  87,464
  96,159
  105,249
  114,735
  123,092
  133,380
  144,080
  155,202
  166,761
  178,773
  191,256
  204,232
  217,724
  231,757
  246,360
  261,562
  277,396
  293,897
  311,100
  329,045
  347,772
  367,324
  387,747
  409,089
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  43,436
  43,890
  50,087
  56,724
  63,789
  71,273
  79,167
  87,464
  96,159
  105,249
  114,735
  123,092
  133,380
  144,080
  155,202
  166,761
  178,773
  191,256
  204,232
  217,724
  231,757
  246,360
  261,562
  277,396
  293,897
  311,100
  329,045
  347,772
  367,324
  387,747
  409,089
Operating income, $m
  4,722
  11,829
  13,783
  15,876
  18,103
  20,463
  22,952
  25,568
  28,309
  31,176
  34,166
  38,810
  42,054
  45,427
  48,934
  52,578
  56,366
  60,302
  64,393
  68,646
  73,071
  77,675
  82,468
  87,461
  92,663
  98,087
  103,745
  109,649
  115,814
  122,253
  128,982
EBITDA, $m
  7,584
  15,508
  17,777
  20,206
  22,793
  25,533
  28,422
  31,460
  34,643
  37,971
  41,443
  45,061
  48,828
  52,745
  56,816
  61,048
  65,445
  70,015
  74,765
  79,704
  84,841
  90,187
  95,752
  101,549
  107,589
  113,887
  120,456
  127,312
  134,470
  141,946
  149,759
Interest expense (income), $m
  1,192
  1,268
  1,779
  2,331
  2,923
  3,552
  4,219
  4,922
  5,661
  6,435
  7,245
  8,090
  8,970
  9,887
  10,840
  11,830
  12,860
  13,930
  15,042
  16,198
  17,399
  18,649
  19,950
  21,304
  22,715
  24,184
  25,717
  27,315
  28,983
  30,725
  32,544
Earnings before tax, $m
  4,413
  10,561
  12,004
  13,544
  15,181
  16,911
  18,733
  20,646
  22,649
  24,740
  26,921
  30,720
  33,083
  35,540
  38,094
  40,748
  43,506
  46,372
  49,351
  52,449
  55,672
  59,026
  62,518
  66,156
  69,948
  73,903
  78,028
  82,334
  86,831
  91,528
  96,438
Tax expense, $m
  9
  2,851
  3,241
  3,657
  4,099
  4,566
  5,058
  5,574
  6,115
  6,680
  7,269
  8,294
  8,932
  9,596
  10,285
  11,002
  11,747
  12,520
  13,325
  14,161
  15,031
  15,937
  16,880
  17,862
  18,886
  19,954
  21,068
  22,230
  23,444
  24,713
  26,038
Net income, $m
  4,318
  7,710
  8,763
  9,887
  11,082
  12,345
  13,675
  15,072
  16,534
  18,060
  19,653
  22,426
  24,151
  25,944
  27,809
  29,746
  31,759
  33,851
  36,026
  38,288
  40,640
  43,089
  45,638
  48,294
  51,062
  53,949
  56,961
  60,104
  63,387
  66,816
  70,400

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  6,607
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  79,511
  84,295
  96,627
  109,833
  123,892
  138,784
  154,492
  171,002
  188,303
  206,392
  225,267
  244,935
  265,406
  286,697
  308,829
  331,830
  355,732
  380,572
  406,392
  433,238
  461,162
  490,219
  520,469
  551,977
  584,811
  619,043
  654,750
  692,014
  730,920
  771,559
  814,026
Adjusted assets (=assets-cash), $m
  72,904
  84,295
  96,627
  109,833
  123,892
  138,784
  154,492
  171,002
  188,303
  206,392
  225,267
  244,935
  265,406
  286,697
  308,829
  331,830
  355,732
  380,572
  406,392
  433,238
  461,162
  490,219
  520,469
  551,977
  584,811
  619,043
  654,750
  692,014
  730,920
  771,559
  814,026
Revenue / Adjusted assets
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
Average production assets, $m
  25,492
  29,475
  33,787
  38,405
  43,321
  48,529
  54,021
  59,794
  65,844
  72,169
  78,769
  85,646
  92,804
  100,249
  107,988
  116,031
  124,388
  133,074
  142,103
  151,490
  161,254
  171,414
  181,992
  193,009
  204,490
  216,460
  228,946
  241,976
  255,580
  269,790
  284,640
Working capital, $m
  11,055
  6,185
  7,090
  8,059
  9,090
  10,183
  11,335
  12,547
  13,816
  15,143
  16,528
  17,971
  19,473
  21,035
  22,659
  24,347
  26,100
  27,923
  29,817
  31,787
  33,836
  35,968
  38,187
  40,499
  42,908
  45,420
  48,040
  50,774
  53,628
  56,610
  59,726
Total debt, $m
  21,363
  28,700
  37,604
  47,138
  57,289
  68,041
  79,382
  91,302
  103,794
  116,854
  130,482
  144,682
  159,462
  174,834
  190,814
  207,420
  224,678
  242,612
  261,254
  280,637
  300,798
  321,777
  343,618
  366,367
  390,072
  414,788
  440,568
  467,473
  495,563
  524,905
  555,566
Total liabilities, $m
  53,524
  60,861
  69,765
  79,299
  89,450
  100,202
  111,543
  123,463
  135,955
  149,015
  162,643
  176,843
  191,623
  206,995
  222,975
  239,581
  256,839
  274,773
  293,415
  312,798
  332,959
  353,938
  375,779
  398,528
  422,233
  446,949
  472,729
  499,634
  527,724
  557,066
  587,727
Total equity, $m
  25,987
  23,434
  26,862
  30,534
  34,442
  38,582
  42,949
  47,538
  52,348
  57,377
  62,624
  68,092
  73,783
  79,702
  85,855
  92,249
  98,894
  105,799
  112,977
  120,440
  128,203
  136,281
  144,691
  153,450
  162,577
  172,094
  182,020
  192,380
  203,196
  214,493
  226,299
Total liabilities and equity, $m
  79,511
  84,295
  96,627
  109,833
  123,892
  138,784
  154,492
  171,001
  188,303
  206,392
  225,267
  244,935
  265,406
  286,697
  308,830
  331,830
  355,733
  380,572
  406,392
  433,238
  461,162
  490,219
  520,470
  551,978
  584,810
  619,043
  654,749
  692,014
  730,920
  771,559
  814,026
Debt-to-equity ratio
  0.822
  1.220
  1.400
  1.540
  1.660
  1.760
  1.850
  1.920
  1.980
  2.040
  2.080
  2.120
  2.160
  2.190
  2.220
  2.250
  2.270
  2.290
  2.310
  2.330
  2.350
  2.360
  2.370
  2.390
  2.400
  2.410
  2.420
  2.430
  2.440
  2.450
  2.460
Adjusted equity ratio
  0.270
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  4,318
  7,710
  8,763
  9,887
  11,082
  12,345
  13,675
  15,072
  16,534
  18,060
  19,653
  22,426
  24,151
  25,944
  27,809
  29,746
  31,759
  33,851
  36,026
  38,288
  40,640
  43,089
  45,638
  48,294
  51,062
  53,949
  56,961
  60,104
  63,387
  66,816
  70,400
Depreciation, amort., depletion, $m
  2,862
  3,679
  3,993
  4,331
  4,689
  5,069
  5,470
  5,892
  6,333
  6,795
  7,277
  6,252
  6,774
  7,317
  7,882
  8,469
  9,079
  9,713
  10,372
  11,058
  11,770
  12,512
  13,284
  14,088
  14,926
  15,800
  16,711
  17,662
  18,655
  19,693
  20,777
Funds from operations, $m
  6,230
  11,388
  12,756
  14,218
  15,771
  17,415
  19,146
  20,964
  22,867
  24,855
  26,929
  28,677
  30,925
  33,262
  35,691
  38,215
  40,839
  43,565
  46,398
  49,345
  52,411
  55,601
  58,922
  62,382
  65,989
  69,749
  73,672
  77,766
  82,042
  86,509
  91,176
Change in working capital, $m
  752
  839
  905
  969
  1,032
  1,093
  1,153
  1,211
  1,269
  1,327
  1,385
  1,443
  1,502
  1,562
  1,624
  1,688
  1,754
  1,823
  1,894
  1,970
  2,049
  2,132
  2,219
  2,312
  2,409
  2,512
  2,620
  2,734
  2,855
  2,982
  3,116
Cash from operations, $m
  5,478
  10,549
  11,851
  13,249
  14,740
  16,322
  17,993
  19,752
  21,597
  23,528
  25,544
  27,234
  29,423
  31,700
  34,067
  36,528
  39,085
  41,742
  44,504
  47,375
  50,362
  53,469
  56,703
  60,071
  63,580
  67,237
  71,052
  75,032
  79,187
  83,527
  88,061
Maintenance CAPEX, $m
  0
  -1,861
  -2,151
  -2,466
  -2,803
  -3,162
  -3,542
  -3,943
  -4,365
  -4,806
  -5,268
  -5,750
  -6,252
  -6,774
  -7,317
  -7,882
  -8,469
  -9,079
  -9,713
  -10,372
  -11,058
  -11,770
  -12,512
  -13,284
  -14,088
  -14,926
  -15,800
  -16,711
  -17,662
  -18,655
  -19,693
New CAPEX, $m
  -3,804
  -3,984
  -4,312
  -4,618
  -4,916
  -5,207
  -5,493
  -5,773
  -6,050
  -6,325
  -6,600
  -6,877
  -7,158
  -7,445
  -7,739
  -8,043
  -8,358
  -8,686
  -9,028
  -9,387
  -9,764
  -10,160
  -10,578
  -11,017
  -11,481
  -11,970
  -12,486
  -13,030
  -13,604
  -14,210
  -14,849
Cash from investing activities, $m
  -3,479
  -5,845
  -6,463
  -7,084
  -7,719
  -8,369
  -9,035
  -9,716
  -10,415
  -11,131
  -11,868
  -12,627
  -13,410
  -14,219
  -15,056
  -15,925
  -16,827
  -17,765
  -18,741
  -19,759
  -20,822
  -21,930
  -23,090
  -24,301
  -25,569
  -26,896
  -28,286
  -29,741
  -31,266
  -32,865
  -34,542
Free cash flow, $m
  1,999
  4,705
  5,388
  6,165
  7,021
  7,952
  8,958
  10,036
  11,183
  12,397
  13,677
  14,607
  16,013
  17,481
  19,011
  20,603
  22,258
  23,977
  25,762
  27,616
  29,540
  31,538
  33,613
  35,769
  38,010
  40,341
  42,766
  45,291
  47,921
  50,661
  53,519
Issuance/(repayment) of debt, $m
  -589
  8,244
  8,904
  9,535
  10,151
  10,752
  11,341
  11,920
  12,492
  13,060
  13,628
  14,200
  14,780
  15,372
  15,980
  16,607
  17,257
  17,934
  18,642
  19,383
  20,161
  20,979
  21,841
  22,749
  23,706
  24,715
  25,781
  26,905
  28,090
  29,341
  30,661
Issuance/(repurchase) of shares, $m
  -518
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,430
  8,244
  8,904
  9,535
  10,151
  10,752
  11,341
  11,920
  12,492
  13,060
  13,628
  14,200
  14,780
  15,372
  15,980
  16,607
  17,257
  17,934
  18,642
  19,383
  20,161
  20,979
  21,841
  22,749
  23,706
  24,715
  25,781
  26,905
  28,090
  29,341
  30,661
Total cash flow (excl. dividends), $m
  492
  12,948
  14,292
  15,700
  17,171
  18,705
  20,300
  21,956
  23,675
  25,457
  27,305
  28,807
  30,793
  32,853
  34,990
  37,209
  39,515
  41,911
  44,404
  46,999
  49,701
  52,517
  55,454
  58,518
  61,716
  65,057
  68,547
  72,196
  76,011
  80,002
  84,180
Retained Cash Flow (-), $m
  -613
  -3,147
  -3,428
  -3,671
  -3,908
  -4,140
  -4,367
  -4,590
  -4,810
  -5,029
  -5,247
  -5,468
  -5,691
  -5,919
  -6,153
  -6,394
  -6,645
  -6,905
  -7,178
  -7,463
  -7,763
  -8,078
  -8,410
  -8,759
  -9,128
  -9,516
  -9,927
  -10,359
  -10,816
  -11,298
  -11,806
Prev. year cash balance distribution, $m
 
  5,700
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  15,501
  10,863
  12,028
  13,263
  14,565
  15,933
  17,366
  18,865
  20,428
  22,057
  23,340
  25,102
  26,934
  28,838
  30,815
  32,870
  35,006
  37,226
  39,535
  41,938
  44,439
  47,044
  49,759
  52,589
  55,540
  58,620
  61,836
  65,195
  68,705
  72,374
Discount rate, %
 
  5.80
  6.09
  6.39
  6.71
  7.05
  7.40
  7.77
  8.16
  8.57
  9.00
  9.45
  9.92
  10.42
  10.94
  11.48
  12.06
  12.66
  13.29
  13.96
  14.66
  15.39
  16.16
  16.97
  17.81
  18.71
  19.64
  20.62
  21.65
  22.74
  23.87
PV of cash for distribution, $m
 
  14,652
  9,652
  9,987
  10,227
  10,360
  10,380
  10,284
  10,071
  9,747
  9,319
  8,646
  8,069
  7,428
  6,744
  6,034
  5,318
  4,613
  3,937
  3,302
  2,721
  2,199
  1,743
  1,353
  1,028
  764
  554
  391
  270
  181
  118
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

The Dow Chemical Company manufactures and supplies products used primarily as raw materials in the manufacture of customer products and services. The Company's segments include Agricultural Sciences, which is engaged in providing crop protection and seed/plant biotechnology products and technologies, urban pest management solutions and healthy oils; Consumer Solutions, which consists of Consumer Care, Dow Automotive Systems, Dow Electronic Materials and Consumer Solutions-Silicones businesses; Infrastructure Solutions, which consists of Dow Building & Construction, Dow Coating Materials, Energy & Water Solutions, Performance Monomers and Infrastructure Solutions-Silicones businesses; Performance Materials & Chemicals, which consists of Chlor-Alkali and Vinyl, Industrial Solutions and Polyurethanes businesses, and Performance Plastics, which consists of Dow Elastomers, Dow Electrical and Telecommunications, Dow Packaging and Specialty Plastics, Energy and Hydrocarbons businesses.

FINANCIAL RATIOS  of  Dow Chemical (DOW)

Valuation Ratios
P/E Ratio 18.7
Price to Sales 1.7
Price to Book 3.1
Price to Tangible Book
Price to Cash Flow 14.7
Price to Free Cash Flow 48.2
Growth Rates
Sales Growth Rate -1.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 1.5%
Cap. Spend. - 3 Yr. Gr. Rate 10.6%
Financial Strength
Quick Ratio 7
Current Ratio 0.1
LT Debt to Equity 78.7%
Total Debt to Equity 82.2%
Interest Coverage 5
Management Effectiveness
Return On Assets 7.5%
Ret/ On Assets - 3 Yr. Avg. 8.9%
Return On Total Capital 9.6%
Ret/ On T. Cap. - 3 Yr. Avg. 12.1%
Return On Equity 16.8%
Return On Equity - 3 Yr. Avg. 21.4%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 22.5%
Gross Margin - 3 Yr. Avg. 21.2%
EBITDA Margin 17.6%
EBITDA Margin - 3 Yr. Avg. 20.3%
Operating Margin 9.8%
Oper. Margin - 3 Yr. Avg. 13.3%
Pre-Tax Margin 9.2%
Pre-Tax Margin - 3 Yr. Avg. 12.9%
Net Profit Margin 9%
Net Profit Margin - 3 Yr. Avg. 10.4%
Effective Tax Rate 0.2%
Eff/ Tax Rate - 3 Yr. Avg. 16.3%
Payout Ratio 57%

DOW stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the DOW stock intrinsic value calculation we used $48158 million for the last fiscal year's total revenue generated by Dow Chemical. The default revenue input number comes from 2016 income statement of Dow Chemical. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our DOW stock valuation model: a) initial revenue growth rate of 15.7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.8%, whose default value for DOW is calculated based on our internal credit rating of Dow Chemical, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Dow Chemical.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of DOW stock the variable cost ratio is equal to 79.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for DOW stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 6.2% for Dow Chemical.

Corporate tax rate of 27% is the nominal tax rate for Dow Chemical. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the DOW stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for DOW are equal to 52.9%.

Life of production assets of 13.7 years is the average useful life of capital assets used in Dow Chemical operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for DOW is equal to 11.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $25987 million for Dow Chemical - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 1226.99 million for Dow Chemical is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Dow Chemical at the current share price and the inputted number of shares is $81.8 billion.

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Financial statements of DOW
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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