Dow: Approaching A Bottom, But Recovery Will Be Gradual

What happened

Dow Inc. is entrenched in a cyclical downturn, with local prices down 8% year-over-year in Q3 2025 and net sales declining across all regions due to weak demand and excess capacity. The company's shares have significantly underperformed, reflecting these persistent industry headwinds and investor skepticism. Recent industry-wide supply cuts and Dow's own cost reduction initiatives, including plant closures, are slowly restoring market balance, hinting at a potential bottom. Despite volatile free cash flow, Dow's strong liquidity position of $12 billion, with no major debt maturities until 2027, provides a crucial buffer against prolonged weakness. However, the recovery is expected to be gradual, hampered by a negative credit outlook and mixed valuation signals that offer little margin of safety.

Implication

The gradual nature of the recovery implies that investors must exercise patience, as any upside will likely be slow and dependent on industry-wide rebalancing. Dow's strong cash reserves and lack of imminent debt maturities reduce liquidity concerns, supporting dividend payments and operational flexibility. However, persistent cyclical weaknesses, such as thin interest coverage and negative free cash flow in some periods, underscore the need for vigilant monitoring of price and volume trends. A shift to a BUY rating would require sustained improvements in free cash flow, interest coverage above 2x, and stabilization of credit ratings. Conversely, further price declines or a credit downgrade could force a SELL recommendation, highlighting the fragility of the current equilibrium.

Thesis delta

The new article reinforces the existing HOLD thesis by acknowledging supply-side improvements but emphasizing the slow pace of recovery, which aligns with the DeepValue report's caution. It does not alter the core assessment that Dow's liquidity strengths are counterbalanced by cyclical vulnerabilities and valuation concerns. Thus, no material shift in investment stance is warranted, and investors should continue tracking key watch items for inflection points.