BUY HOLD SELL A+ A A- B+ B B- C+ C C- D+ D D- E+ E E- F Annual Dividend Rate BUY BUY RATING SINCE 09/28/2004 TARGET PRICE $45.29 BUSINESS DESCRIPTION Provides chemical, plastic and agricultural products and services to a variety of consumer markets. The company's products are used primarily as raw materials in the manufacture of customer products and services. Sales were approximately $46.3 billion in 2005. STOCK PERFORMANCE (%) 3 Mo. 1 Yr. 3 Yr (Ann) Price Change 3.86-5.39 6.36 GROWTH (%) Last Qtr 12 Mo. 3 Yr CAGR Revenues 9.24 8.08 16.25 Net Income -19.14-2.99 178.06 EPS -19.24-3.41 173.59 RETURN ON EQUITY (%) Ind Avg S&P 500 Q2 2006 24.71 16.13 15.88 Q2 2005 30.34 18.57 14.20 Q2 2004 24.40 10.92 13.79 Source: Materials Sub-Industry: Diversified Chemicals Source: GICS Weekly Price: (US$) SMA (50) SMA (100) 1 Year 2 Years Rating History BUY Volume in Millions HIGH: $56.42 2004 2005 2006 COMPUSTAT for Price and Volume, TheStreet.com Ratings, Inc. for Rating History TARGET PRICE $45.29 LOW: $34.03 58 55 53 50 48 45 43 40 38 35 33 60 40 20 0 P/E COMPARISON RECOMMENDATION We rate () a BUY. This rating is driven by a positive industry outlook relating to demand along with the company s improving financial position. Also, has been consistently delivering superior returns to its shareholders. Our rating could be at risk from any significant increase in input costs or a slowdown in industrial activity, which could lead to lower chemical demand. 9.23 EPS ANALYSIS¹ ($) 19.88 Ind Avg 18.44 S&P 500 HIGHLIGHTS Positive outlook. The outlook for the Chemicals industry is favorable, driven by solid demand in China and other emerging economies. In the quarters ahead, the company expects a favorable demand scenario coupled with limited supply growth to be beneficial. Improving financial position. has been able to improve its financial position, even amid significant increase in input costs. The company has been able to successfully reduce its SG&A (selling, general & administrative) expense, improve its sales per employee, and maintain its capital spending below the depreciation charge. Over the past one year, enforced a tight financial discipline and reduced its total debt by $1.17 billion. Q1 0.50 Q2 0.72 Q3 0.65 2004 Q4 1.06 Q1 1.39 Q2 1.30 Q3 0.82 2005 NA = not available NM = not meaningful Q4 1.14 Q1 1.24 Q2 1.05 2006 1 Compustat fiscal year convention is used for all fundamental data items. Exceptional shareholder returns. Even though the company s return-on-equity declined to 24.71% in Q2 FY06, it has been consistently surpassing the averages of the Chemicals industry and the S&P 500 for the last three years, supported by high earnings growth (3-year CAGR of 178.1%) and share repurchases. Going forward, this positive trend is expected to continue as more than 12 million shares remain to be repurchased under the company s buyback program. Also, the company offers an attractive dividend yield at the current market price. Risks to the BUY rating. Risks to our rating include the possibility of a significant increase in input costs. Also, a global slowdown in industrial activity could reduce the demand for chemicals. PAGE 1
PEER GROUP ANALYSIS REVENUE GROWTH AND EBITDA MARGIN* Revenue Growth (TTM) -15% 20% ASH UNFAVORABLE 6% CBT HUN EBITDA Margin (TTM) EMN PPG AKZOY FAVORABLE BF FMC BAY DD 22% Companies with higher EBITDA margins and revenue growth rates are outperforming companies with lower EBITDA margins and revenue growth rates. Companies for this scatter plot have a market capitalization between $2.4 Billion and $40.4 Billion. Companies with NA or NM values do not appear. *EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization. REVENUE GROWTH AND EARNINGS YIELD Revenue Growth (TTM) -15% 20% UNFAVORABLE -2% CBT Earnings Yield (TTM) DD PPG FMC HUN BAY FAVORABLE ASH EMN BF AKZOY 12% Companies that exhibit both a high earnings yield and high revenue growth are generally more attractive than companies with low revenue growth and low earnings yield. Companies for this scatter plot have revenue growth rates between -13.8% and 18.1%. Companies with NA or NM values do not appear. INDUSTRY ANALYSIS The Chemicals Industry is a vital one within the world economy as its products add value to countless others, from commodity raw materials to intermediate inputs of other industries. The chemicals industry is linked to the oil and gas, pharmaceuticals, auto, housing, cosmetics, manufacturing, construction, and agricultural industries. The two most critical factors impacting the financial health of chemical companies are the costs of raw materials (mainly oil and gas) and the overall strength of the economy. The Chemical Industry is extremely diverse, though broken down into two main segments: basic and specialty chemicals. The basic chemical segment sells primarily to cyclical industries including automotive, housing, packaging, apparel/textile, and steel. Companies in the specialty chemical segment provide products to industries such as agriculture, paper production, housing, and electronics manufacturing. Increased competition in niche markets has effectively diluted pricing power. The hurricanes of 2005 in the US Gulf Coast had significant impacts on both the US and worldwide Chemical industry as this region is considered the center of the US petrochemical industry. The storms caused not only temporary shutdowns in operations but also delays in transporting the inputs and outputs of the chemical and oil & gas refining centers. This situation left oil and gas suppliers in the region operating at less than full capacity, increasing the price of inputs for chemical producers. According to the American Chemistry Council (ACC), the chemicals industry accounts for US domestic output valued at about $550 billion. The growing demand for more resources and raw materials in all industries in the developing world has heightened the importance of international trade to the US chemicals industry. US chemical exports are estimated by the ACC to be about $122 billion for 2005. One key to the near term outlook is the industry s ability to leverage foreign investments to compete more aggressively with foreign rivals for the increasing basic and specialty chemicals demand coming from emerging market economies. Threats to chemical companies bottom-line growth are numerous. Companies continue to face the threat of rising natural gas prices. Gas prices are currently high and vary widely depending on the region. As natural gas is an essential component in various chemical products, companies face increasing production costs with higher gas prices. The difference between companies now boils down to their ability to effectively source their inputs at the lowest cost and how effectively they manage the production process. These threats could lead to higher prices for consumers, diverting their business towards lower cost foreign companies. PEER GROUP: Chemicals Recent Market Price/ Net Sales Net Income T icker Company Name Price ($) Cap ($M) Earnings TTM ($M) TTM ($M) 39.21 37,616 9.23 47,707.00 4,134.00 ASH ASHLAND INC 64.57 4,591 14.81 9,976.00 318.00 EMN EASTMAN CHEMICAL CO 54.40 4,475 10.99 7,277.00 408.00 HUN HUNTSMAN CORP 18.20 4,264 19.57 12,804.40 241.00 BF BASF AG 80.14 40,357 10.37 58,255.96 3,967.35 DD DU PONT (E I) DE NEMOURS 43.37 40,166 21.79 27,448.00 1,863.00 BAY BAYER AG 50.50 38,599 19.57 34,031.36 1,955.55 FMC FMC CORP 64.30 2,511 22.17 2,218.60 104.90 CBT CABOT CORP 37.15 2,353 NM 2,437.00 1.00 AKZOY AKZO NOBEL NV 61.12 17,489 12.95 16,563.61 1,350.14 PPG PPG INDUSTRIES INC 68.09 11,247 15.51 10,514.00 734.00 The peer group comparison is based on Major Diversified Chemicals companies of comparable size. PAGE 2
Annual Dividend Rate COMPANY DESCRIPTION The Dow Chemical Co. provides chemical, plastic and agricultural products and services to many essential consumer markets. The company's products are used primarily as raw materials in the manufacture of customer products and services. As of Dec. 31, 2005, the company had 156 manufacturing sites in 37 countries and supplied more than 3,200 products grouped within its operating segments. Dow Chemical serves the following industries: appliance; automotive; agricultural; building and construction; chemical processing; electronics; furniture; housewares; oil and gas; packaging; paints, coatings and adhesives; personal care; pharmaceutical; processed foods; pulp and paper; textile and carpet; utilities; and water treatment. The company's reportable operating segments are: Performance Plastics; Performance Chemicals; Agricultural Sciences; Plastics; Chemicals; and Hydrocarbons and Energy. Unallocated and Other contains the reconciliation between the totals for the reportable segments and the company's totals. Performance Plastics includes: solutions for automotive interior, exterior, chassis/power train and body engineered systems applications; engineering polymers and compounds; epoxy products, as well as intermediates used by epoxy producers; plastic film and foam products; polyurethane raw materials and polyurethane systems; licensing and supply of catalysts; and performance polyolefin products marketed for wire and cable applications. Performance Chemicals includes: custom and fine chemicals; emulsion polymers; industrial chemicals; oxide derivatives; specialty polymers; emulsion systems; and water soluble polymers. Agricultural Sciences provides pest management, agricultural and crop biotechnology products. Plastics include: polyethylene-based solutions; polypropylene products; and the production of polystyrene resins. Chemicals include the company's core chemicals business and its ethylene oxide/ethylene glycol business. The company's Hydrocarbons and Energy segment encompasses the procurement of fuels, natural gas liquids and crude oil-based raw materials, as well as the supply of monomers, power and steam for use in its global operations. International sales accounted for approximately 62% of total sales in 2005. 2030 Dow Ctr Midland, MI 48674-0001 USA Phone: 989-636-1000 http://www.dow.com Employees: 42000 STOCK-AT-A-GLANCE Below is a summary of the major fundamental and technical factors we consider when determining our overall recommendation of shares. It is provided in order to give you a deeper understanding of our rating methodology as well as to paint a more complete picture of a stock's strengths and nesses. It is important to note, however, that these factors only tell part of the story. To gain an even more comprehensive understanding of our stance on the stock, these factors must be assessed in combination with the stock s valuation. Please refer to our Valuation section on page 5 for further information. FACTOR SCORE Growth 4.0 out of 5 stars Measures the growth of both the company's income statement and cash flow. On this factor, has a growth score better than 70% of the stocks we rate. Total Return 2.0 out of 5 stars Measures the historical price movement of the stock. The stock performance of this company has beaten 30% of the companies we cover. Efficiency 4.5 out of 5 stars Measures the strength and historic growth of a company's return on invested capital. The company has generated more income per dollar of capital than 80% of the companies we review. Price volatility 2.0 out of 5 stars Measures the volatility of the company's stock price historically. The stock is less volatile than 30% of the stocks we monitor. Solvency 4.5 out of 5 stars Measures the solvency of the company based on several ratios. The company is more solvent than 80% of the companies we analyze. Income 5.0 out of 5 stars Measures dividend yield and payouts to shareholders. The company's dividend is higher than 90% of the companies we track. THESTREET.COM RATINGS RESEARCH METHODOLOGY TheStreet.com Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates. While our model is quantitative, it utilizes both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings. Objective elements include volatility of past operating revenues, financial strength, and company cash flows. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e.how much one is willing to risk in order to earn profits; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's performance. These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. PAGE 3
Consensus EPS Estimates² ($) IBES consensus estimates are provided by Thomson Financial 0.96 Q3 FY06 4.19 E 2006(E) 4.06 E 2007(E) INCOME STATEMENT Net Sales ($mil) 12,509.00 11,450.00 EBITDA ($mil) 1,667.00 1,947.00 EBIT ($mil) 1,184.00 1,483.00 Net Income ($mil) 1,023.00 1,265.00 BALANCE SHEET Cash & Equiv. ($mil) 3,198.00 3,201.00 Total Assets ($mil) 46,143.00 44,887.00 Total Debt ($mil) 10,217.00 11,391.00 Equity ($mil) 16,812.00 14,043.00 PROFITABILITY Gross Profit Margin 18.83% 22.72% EBITDA Margin 13.33% 17.00% Operating Margin 9.47% 12.95% Sales Turnover 1.03 0.98 Return on Assets 8.96% 9.49% Return on Equity 24.71% 30.34% FINANCIAL ANALYSIS operates through seven segments: Basic Plastics (contributing 23.9% of Q2 FY06 revenue), Performance Plastics (27.5%), Performance Chemicals (15.7%), Hydrocarbons & Energy (13.2%), Basic Chemicals (11.3%), Agricultural Sciences (7.7%) and Unallocated & Others (0.7%). Overall, s revenue increased by 9.2% to $12.50 billion in Q2 FY06 compared to Q2 FY05 due to a 5.0% rise in selling price and 4.0% volume growth. On a segmental basis, Basic Plastics sales increased 16.0% due to price increases in North America and Europe, as a result of higher feedstock costs. Basic Chemicals sales increased 5.0% due to higher selling prices. Hydrocarbons & Energy sales increased 5.0% as a result of higher realized prices. Performance Plastics sales were up 13.0% driven by higher volume growth. Performance Chemicals sales increased 5.0% due to a higher volume of Designed Polymers and Specialty Chemicals sold. However, Agricultural Sciences sales decreased 7.0%; this was largely due to reduced sales of selective corn herbicides in North America. s gross profit margin decreased by 389 basis points to 18.83% in Q2 FY06, as higher price realizations were more than offset by increased costs related to the feedstock naphtha, energy, and raw materials. As a result, the company s operating profit decreased 20.1% to $1.18 billion, contained partly by a lower SG&A expense as a percentage of sales. Despite a decline in interest expense, net income decreased by 19.1% overall to $1.02 billion in Q2 FY06. The fall in net income was aggravated by a higher effective tax rate. Net cash flow generated from operations decreased to $1.23 billion, compared to $1.33 billion same quarter prior-year due to lower net income. Net cash used for investing activities was $856.00 million, mainly to fund capital expenditures. The company used $1.73 billion in its financing activities to fund share repurchases, stock dividend payments, and debt repayment. As a result, s cash and equivalents decreased to $3.19 billion compared to $3.42 billion at the beginning of the quarter. On the balance sheet, shareholders equity ( net worth ) stood 19.7% higher at $16.81 billion due to internal accruals. Total debt declined by 10.3% to $10.21 billion, resulting in an improved debt-to-equity ratio of 0.60. DEBT Current Ratio 1.81 1.68 Debt/Capital 0.38 0.45 Interest Expense 151.00 188.00 Interest Coverage 7.84 7.89 SHARE DATA Shares outstanding (mil) 959 965 Div / share 0.38 0.34 EPS 1.05 1.30 Book value / share 17.52 14.56 Institutional Own % NA NA Avg Daily Volume 4,845,011 5,084,522 2 Sum of quarterly figures may not match annual estimates due to use of median consensus estimates. PAGE 4
RATINGS HISTORY Our rating for has not changed since 12/9/2003. As of 9/28/2006, the stock was trading at a price of which is 17.0% below its 52-week high of $47.21 and 18.8% above its 52-week low of $33.00. 2 Year Chart BUY: $43.79 2004 2005 $60 $50 $40 MOST RECENT RATINGS CHANGES Date Price Action From To 9/28/04 $43.79 No Change Buy Buy Price reflects the closing price as of the date listed, if available RATINGS DEFINITIONS & DISTRIBUTION OF THESTREET.COM RATINGS (as of 9/28/2006) 36.96% Buy - We believe that this stock has the opportunity to appreciate and produce a total return of more than 10% over the next 12 months. 31.73% Hold - We do not believe this stock offers conclusive evidence to warrant the purchase or sale of shares at this time and that its likelihood of positive total return is roughly in balance with the risk of loss. 31.31% Sell - We believe that this stock is likely to decline by more than 10% over the next 12 months, with the risk involved too great to compensate for any possible returns. TheStreet.com Ratings, Inc. 15430 Endeavour Drive Jupiter, FL 33478 www.thestreet.com/ratings Research Contact: 617-273-8320 Sales Contact: 800-377-3370 VALUATION BUY. The current P/E ratio indicates a significant compared to an average of 19.88 for the Chemicals industry and a compared to the S&P 500 average of 18.44. For additional comparison, its price-to-book ratio of 2.24 indicates a versus the S&P 500 average of 2.84 and a versus the industry average of 3.48. The price-to-sales ratio is well below both the S&P 500 average and the industry average, indicating a. Upon assessment of these and other key valuation criteria, proves to trade at a to investment alternatives within the industry. Price/Earnings 9.23 Peers 19.88 Discount. A lower P/E ratio than its peers can signify a less expensive stock or lower growth expectations. is trading at a significant to its Price/Projected Earnings 9.67 Peers 17.35 Discount. A lower price-to-projected earnings ratio than its peers can signify a less expensive stock or lower future growth expectations. is trading at a significant to its Price/Book 2.24 Peers 3.48 Discount. A lower price-to-book ratio makes a stock more attractive to investors seeking stocks with lower market values per dollar of equity on the balance sheet. is trading at a significant to its Price/Sales 0.79 Peers 1.64 Discount. In the absence of P/E and P/B multiples, the price-to-sales ratio can display the value investors are placing on each dollar of sales. is trading at a significant to its industry on this measurement. DISCLAIMER: Price/CashFlow 9.43 Peers 14.12 Discount. The P/CF ratio, a stock s price divided by the company's cash flow from operations, is useful for comparing companies with different capital requirements or financing structures. is trading at a significant to its Price to Earnings/Growth NM Peers 0.74 Neutral. The PEG ratio is the stock s P/E divided by the consensus estimate of long-term earnings growth. Faster growth can justify higher price multiples. 's negative PEG ratio makes this valuation measure meaningless. Earnings Growth -3.41 higher Peers 22.87 lower Lower. Elevated earnings growth rates can lead to capital appreciation and justify higher price-to-earnings ratios. However, is expected to significantly trail its peers on the basis of its earnings growth rate. Sales Growth 8.08 higher Peers 7.36 lower Average. Comparing a company's sales growth to its industry helps to determine if the company is adding or losing market share. is keeping pace with its peers on the basis of sales growth. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but TheStreet.com Ratings, Inc. can not guarantee its accuracy and completeness, and that of the opinions based thereon. Data is provided via the COMPUSTAT Xpressfeed product from Standard &Poor s, a division of The McGraw-Hill Companies, Inc., as well as other third-party data providers. TheStreet.com Ratings, Inc. is a wholly owned subsidiary of TheStreet.com, Inc. which is a publisher and has registered as an investment adviser with the U.S. Securities and Exchange Commission. This research report contains opinions and is provided for informational purposes only. You should not rely solely upon the research herein for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in this report constitutes, or is intended to constitute a recommendation by TheStreet.com Ratings, Inc. of any particular security or trading strategy or a determination by TheStreet.com Ratings, Inc. that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. PAGE 5