Dow Inc's Cost Cuts Face Earnings Test Amid Persistent Chemical Downturn

What happened

Dow Inc is entrenched in a deep chemical downcycle, with global polyethylene overcapacity from China pressuring its largest segment, Packaging & Specialty Plastics, which accounts for half of sales. The company is aggressively executing a $1 billion cost-cutting and European restructuring plan, reportedly ahead of schedule, to shore up margins and rationalize high-cost assets. However, financial stress persists, as seen in negative free cash flow, leverage near 4x EBITDA, and a 50% dividend cut in 2025, with Q3 2025 Operating EBIT at just $180 million despite early savings. Valuation at 9.95x EV/EBITDA reflects a mid-pack premium based on Dow's North American cost advantage, but earnings have collapsed amid weak pricing and volume declines. The incoming earnings report will be crucial to determine if cost reductions are effectively offsetting cyclical headwinds and supporting a path to sustainable profitability.

Implication

The immediate implication is that Dow's Q4 2025 earnings must show operating cash flow sustaining above ~$900 million and clear margin expansion in key segments to validate the restructuring progress. If results disappoint, it may indicate that the $1 billion savings are insufficient against structural overcapacity, raising the likelihood of further credit downgrades or another dividend cut. Conversely, stronger-than-expected earnings could signal a faster recovery, supporting the bull case and a valuation move toward the $30 base scenario, but this remains contingent on external cycle improvements. Long-term, investors need to see sustained positive free cash flow by 2026 and leverage reduction below 3x EBITDA, alongside disciplined execution of Path2Zero and European closures without cost overruns. Given the high uncertainty and bearish sentiment, maintaining a cautious stance with entry points around $23 offers better risk-reward than buying at current levels without proof of turnaround.

Thesis delta

The DeepValue report's 'WAIT' rating remains unchanged, as the incoming earnings do not alter the core thesis requiring sustainable positive free cash flow and leverage reduction below 3x EBITDA. However, this release serves as a critical near-term catalyst to assess whether cost savings are gaining traction against persistent industry headwinds, potentially accelerating or delaying the 6-12 month re-assessment window.