Dow Chemical Company

A chemical companies' chemical company, most of Dow Chemical's sales are intermediate products that other companies integrate into their own products rather than consumer goods. As a consequence, Dow Chemical has been able to effectively inoculate itself against the rising costs of industrial inputs.

Only BASF is a larger manufacturer of chemicals. But Dow Chemical is very heavily invested in hydrocarbons. Deriving approximately 50% of its sales from basic and performance plastics, the company needs access to enormous quantities of petroleum products even though its Hydrocarbons and Energy segment only accounts for 13% of sales.

Dow Chemical tends not to make large capital investments on its own. Rather, the company leverages its extensive intellectual capital to make joint projects work using someone else's capital. Dow Chemical is effectively moving from the restrictive operating environment in Western Europe and the United States and making increasing investments in the Middle East and Asia.

Dow Chemical faces significant downside risks coming from increasing environmental regulation, litigation relating to past environmental pollution, and geopolitical risk that its Middle Eastern and Asian operations could be either confiscated or otherwise rendered unprofitable by autocratic governments.

Dow Chemical's downside risks are more than balanced by the continuing strength of its core plastics business as well as a strong history of technological innovation. While Dow Chemical is more tightly integrated with the risk of petrochemical supply disruption, it is also better positioned to benefit from sustained higher prices. Dow Chemical is a strong buy, but its obvious dependence on the global oil industry needs to be considered when constructing any portfolio. Don't buy lots of energy industry stocks and expect Dow Chemical to provide any significant diversification.