Raising Dow's FVE to $72 Despite Near-Term Headwinds; Prospects Are Favorable in 2024 and Beyond

Narrow-moat Dow reported a weak fourth quarter as inflation, economic concerns, and geopolitical tensions tempered demand and inhibited firm operations around the world. Fourth-quarter revenue declined 17% year over year and 16% sequentially due to reduced volumes and unfavorable pricing movements on top of standard seasonal impacts. On the whole, 2022 results were solid for Dow due to a strong first half. Annual revenue increased 3.5% year over year following an exceptionally strong 2021. The firm's annual EBITDA margin contracted to 21% from 28% but remained above its historical average of 17%. Many of the challenges that materialized at the end of 2022 will likely persist into the first quarter of 2023, but we maintain our view that these near-term headwinds—some of which are already abating—are unlikely to materially constrain Dow’s potential value generation over the long run. In fact, we’re raising our fair value estimate to $72 from $65 following results.