RBC Bullish On New Dow, Less So On DowDupont

While RBC Capital Markets is bullish on the new company split off from an old chemicals name, it’s less positive on what remains of the old business. 

The Analyst

Arun Viswanathan initiated coverage of Dow Inc. (NYSE: DOW) with a Top Pick rating and $68 price target.

Viswanathan downgraded DowDuPont Inc. (NYSE: DWDP) from Top Pick to Sector Perform and lowered the price target from $61 to $40.

The Dow Thesis 

Historically, buying at the bottom of the margin cycle for polyethylene and selling at more normal levels has proven a safe way to play commodity stocks like the new Dow Inc., Viswanathan said in the Tuesday initiation note. (See his track record here.) 

Polyethylene margins are likely to reach a trough over the next year, the analyst said. 

“With DOW starting up and de-bottlenecking several facilities and capex coming down to about $2.5-3B over the next several years … Dow enters harvest mode and FCF/EBITDA conversion is set to improve to 90 percent in 2021E from 15 percent in 2018,” he said. “The new Dow accepts its fate as the ultimate commodity cash machine.”

Viswanathan said he’s also bullish on the new Dow because of a commitment by the company to returning more to shareholders.

Headwinds For DowDuPont? 

The remnant company doesn’t look as good to Viswanathan. DWDP has spun off its materials business and will soon do the same with its agriculture division. That leaves it focused its specialty division, which works in technology and chemicals in a range of industries.

But that area faces some macro headwinds, Viswanathan said — particularly in Europe and China, where economic growth is slowing. Challenges are likely to be seen in the auto and electronics industries, he said.

The agriculture division at DowDupont also is expected to see continued weakness because of

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