Dow vs. Air Products & Chemicals: Which Stock is a Better Buy?

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Despite concerns related to carbon emissions and high raw material costs, the recovery of the chemical industry has been primarily driven by strong demand for both commodity and specialty chemicals. In addition, the need for chemicals is expected to increase with the reopening of the economy due to the rising use of chemicals in major end markets such as automotive and construction. Moreover, accelerating business transformation through digital technologies is expected to boost the chemical industry’s growth in the upcoming years. According to a Verified Market Research report, the global specialty chemicals market is expected to grow at a CAGR of 6.2% by 2028. Therefore, both Dow Inc. (DOW) and Air Products and Chemicals Inc. (APD) should benefit.

DOW provides various materials science solutions for consumer care, infrastructure, and packaging markets. It operates through Packaging & Specialty Plastics; Industrial Intermediates & Infrastructure; and Performance Materials and Coatings segments. APD provides atmospheric gasses, process, and specialty gasses, equipment, and services worldwide. It collaborates with Baker Hughes (BKR) to develop hydrogen compression systems.

Over the past month, DOW has gained 10.1%, while APD has returned 3.7%. However, APD’s 11.6% gains over the past year are higher than DOW’s 8.1% returns. Moreover, APD is the clear winner with 17% gains versus DOW’s 0.3% returns in terms of the past three months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 6, 2021, DOW announced its plan to build the world’s first net-zero carbon emissions integrated ethylene cracker and derivatives site with respect to scope 1 and 2 carbon dioxide emissions. DOW’s Chairman and CEO Jim Fitterling said, “Our advantaged position and disciplined approach to capital investment makes us well-positioned to lead the industry in decarbonizing, growing and accelerating Dow’s path toward carbon neutrality.”

On November 18, 2021, ADP’s Board of Directors declared a quarterly dividend of $1.50 per share of common stock, representing a 12% increase. The dividend is payable on February 14, 2022, to shareholders of record at the close of business on January 3, 2022.

Recent Financial Results

DOW’s net sales increased 53% year-over-year to $14.80 billion for the fiscal third quarter ended September 30, 2021. The company’s operating EBITDA grew 143.2% year-over-year to $3.61 billion, while its net income came in at $1.71 billion compared to a loss of $1 million in the prior-year quarter. Also, its operating EPS came in at $2.75, up 450% year-over-year.

ADP’s sales increased 22% year-over-year to $2.84 billion for the fiscal fourth quarter ended September 30, 2021. The company’s adjusted EBITDA grew 11% year-over-year to $1.04 billion, while its net income came in at $619 million representing a 25% year-over-year increase. Also, its EPS came in at $2.51, up 15% year-over-year.

Expected Financial Performance

Analysts expect DOW’s revenue to increase 1.1% for the quarter ending March 31, 2022, but decrease 5.5% next year. The company’s EPS is expected to grow 15.7% for the quarter ending March 31, 2022, but decline 29.8% next year. Moreover, its EPS is expected to grow at 56% per annum over the next five years.

On the other hand, ADP’s revenue is expected to increase 8.5% for the quarter ending March 31, 2022, and 7.4% next year. Its EPS is expected to grow 20.9% for the quarter ending March 31, 2022, and 13.4% next year. Also, the company’s EPS is expected to grow at a rate of 13% per annum over the next five years.

Profitability

DOW’s trailing-12-month revenue is 4.97 times what ADP generates. DOW is also more profitable with a levered FCF margin of 8.19% compared to ADP’s 3.85%.

Furthermore, DOW’s ROE, ROA, and ROTC of 39.37%, 7.40%, and 13.61% are higher than ADP’s 15.41%, 5.66%, and 6.83%, respectively.

Valuation

In terms of forward non-GAAP P/E, ADP is currently trading at 28.91x, 340.7% higher than DOW’s 6.56x. Moreover, ADP’s forward non-GAAP PEG ratio of 2.48x is significantly higher than DOW’s 0.11x.

So, DOW is relatively affordable here.

POWR Ratings

DOW has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, ADP has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

DOW has an A grade for Value, consistent with its forward non-GAAP PEG of 0.11x, 91.3% lower than the industry average of 1.30x. However, ADP has a D grade for Value, in sync with its non-GAAP PEG of 2.48x, 90.5% higher than the industry average of 1.30x.

Of the 89 stocks in the A-rated Chemicals industry, DOW is ranked #33. In comparison, ADP is ranked #60.

Beyond what I’ve stated above, we have also rated the stocks for Quality, Momentum, Growth, Stability, and Sentiment. Click here to view all the DOW ratings. Also, get all the ADP ratings here.

The Winner

The chemical industry is expected to grow in the upcoming months with increasing demand. While DOW and ADP are expected to benefit from the industry tailwinds, it is better to invest in DOW now because of its lower valuation, higher profitability, and better financials.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Chemicals industry here.


APD shares were trading at $304.24 per share on Wednesday afternoon, up $4.82 (+1.61%). Year-to-date, APD has declined -0.01%, versus a -1.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal’s fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More…

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