Dow Inc Spin-Off: Classic Value Investment Story?

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Dow Inc Spin-Off: Classic Value Investment Story?
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Alex Gavrish discusses Dow Inc spin-off from DowDuPont

Shares of Dow Inc, a spin-off from DowDuPont, started trading on March 20th, 2019 on a when-issued basis. At $50 per shares, Dow Inc’s market cap is approximately $37.5 billion. According to the company’s roadshow presentation, Dow Inc will have a net debt of $15 billion at the spin-off while FY 2018 operating EBITDA was $9.1 billion. This means that Dow Inc is currently valued at an EV/EBITDA multiple of x5.77. This looks low, especially compared to the valuation of DowDuPont combined: it currently trades at an EV/EBITDA ratio of about x9.3 (FY 2018 results).

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Already before the spin-off, the company announced that initially, it plans to pay an annual dividend in the amount of $2.1 billion, which provides investors with an annual yield of 5.6% percent. Dow will also have share repurchase program in place, initially for $3 billion. Assuming that it will be implemented over 3 years, shareholders will be rewarded with an additional annual yield of 2.6% percent.

Assuming a more “normal” EV/EBITDA multiple and generation of $3 billion of FCF annually, in two years Dow Inc shares could be valued at $79 per share, which provides an upside of 58% percent.

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Alex Gavrish is a founder and CEO of Etalon Capital Ltd. Alex was born and grew up in Kiev, Ukraine, then part of the Soviet Union, and immigrated to Israel at the age of 18. He is the author of three books: Wall Street: Back to Basics, which explains how investors can achieve greater success in managing their investments and make better investment decisions. In his second book Story Investing he proposes to look at companies and stocks as stories, and shows that the narrative mode of thinking is complementary to analytical one and not its enemy. Using techniques and insights from storytelling and fiction literature, investors can be more creative and finally practice the art part of investing. Time Investing is an effort to better understand time – one of the most difficult aspects of the investment practice. Alex has an MBA degree from Technion, Israel.

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