Dow's Q4 Sales Fall 9% Amid Persistent Downcycle, Reinforcing Wait Stance

What happened

Dow reported fourth-quarter 2025 net sales of $9.5 billion, a 9% year-over-year decline driven by decreases across all operating segments, highlighting ongoing industry pressures. This aligns with the DeepValue report's assessment of a deep ethylene/polyethylene downcycle fueled by global overcapacity and weak demand, particularly in Europe and Asia. The sales drop suggests that Dow's $1 billion restructuring program and European asset closures are not yet offsetting cyclical headwinds, as margin compression persists despite cost-cutting efforts. Critically, the report rates Dow a 'WAIT' due to negative free cash flow, leverage near 4x EBITDA, and risks of further credit downgrades if conditions worsen. Without visible EBIT improvement from restructuring, Dow remains vulnerable to a protracted downturn, underscoring the need for cautious analysis beyond management's optimistic framing.

Implication

The Q4 results underscore that Dow's recovery depends on executing its $1 billion restructuring amid persistent overcapacity, delaying earnings normalization and increasing reliance on self-help measures. Key implications include monitoring whether free cash flow turns positive by mid-2026 and leverage falls below 3x EBITDA, as failure could trigger further credit downgrades or dividend cuts. Investors must scrutinize if cost savings from European closures translate into tangible EBIT growth, rather than being offset by pricing pressures and operational inefficiencies. With the share price near $27.57, close to the report's attractive entry of $23, patience is advised until clearer evidence of operational stability emerges. Ultimately, the sales slump reinforces the need for a defensive stance, prioritizing balance sheet repair over early entry into a still-stressed turnaround story.

Thesis delta

The Q4 sales decline reinforces the DeepValue report's bear case assumptions of persistent industry overcapacity and margin pressure, slightly increasing the probability of that scenario. It emphasizes the urgency for Dow to demonstrate that its restructuring efforts can drive EBIT improvements despite declining sales, but does not yet alter the core thesis to wait for sustainable positive free cash flow and leverage reduction below 3x EBITDA by mid-2026.