Option Trade
Dow Chemical Co (NYSE:DOW) Calls 
Wednesday, May 06, 2015

**OPTION TRADE: Buy the DOW Sep 2015 50.000 call (DOW150918C00050000) at or under $3.20, good for the day. Place a protective stop loss at $1.20 and a pre-determined sell at $6.50.

by Ian Harvey

May 06, 2015

Introduction

Following on from our recommendation on March 30th, which quickly provided a 100% on our investment at that time, we are now recommending another call option play on Dow Chemical Co (NYSE: DOW).

Dow Chemical Co, a chemical manufacturer in the agribusiness, which combines the power of science and technology to passionately innovate what is essential to human progress, had previously announced that it was removing its chemical business on Olin Corporation (NYSE: ODP).

Now, DOW has managed to provide further catalysts to push their share price higher -- it will lay off 3% of its workforce resulting in $300M cost savings, on top of transforming itself by selling off its commodity business to focus on high value business and high margin business.

The market has not reacted to the implications that this has been provided as yet, which is great for this recommendation – as this now makes Dow Chemical a strong buy!

The CEO Andrew Liveris said:-

"Today's announcement is an example of creating an agile, more market-driven Dow, with less cost structures, and more investment where investment should be as the market place with customers." He added that the company is continuously evolving to create more value.

Regarding the euro's recovery, Liveris is very bullish as he believes that currency recovery means a 1-1.5% benefit to the economy. He said that the company is positively leveraged to oil. As oil moves north, the company will do even better.

There are also new projects in Saudi Arabia, Texas and Louisiana. With the improvement in the economy, DOW is on the way up.

Technical Details

Dow Chemical Co is currently trading 3.66% below its 52-week-high, 26.87% above its 52-week-low. The 12-months range for the stock is $40.71 – $53.61.

Dow Chemical Co has a price to earnings ratio of 18 versus Basic Materials sector average of 17.55. DOW stock price has outperformed the S&P 500 by 11.8%.

The Diversified Chemicals company is currently valued at $59.5 billion and its share price closed the last trading session at $51.65.

The stock has a 50-day moving average of $48.98 and a 200-day moving average of $47.87.

Dow Chemical Co’s current short interest stands at 11.66 million shares. It has decreased by 13% from the same period of last month. Around 2% of the company’s shares, which are float, are short sold. With a 10-days average volume of 6.75 million shares, the number of days required to cover the short positions stand at 1.8 days.

Earnings

DOW reported last quarter earnings on April 23. The Company announced earnings per share of $0.84 against a consensus Street estimate of $0.78, beating the average estimate by $0.06. This corresponds to an increase of $0.35 compared to the same quarter of the previous fiscal year.

Positive Aspects

Dow Chemical Co announced a series of actions to further streamline the organization and optimize its footprint as a result of the Company’s pending separation of a significant portion of its chlorine value chain.

Dow has shifted its portfolio toward targeted, integrated high-value markets, and as a result the Company is taking additional actions to further enhance its organizational effectiveness – with a focus on driving geographic market engagement coupled with global efficiency – to deliver maximum value from its growth investments.

The actions will further accelerate Dow’s value growth and productivity targets, and will result in a reduction of about 1,500 – 1,750 positions, or about 3 percent of the global workforce. In parallel, the Company is also announcing additional minor adjustments to its asset footprint to enhance competitiveness.

The Company will take charges totaling about $330 million – $380 million in the second quarter of 2015 for asset impairments, severance and other costs related to these measures, which are predictable to be accomplished during the next two years. Once fully implemented, these actions are predictable to result in about $300 million of annual operating cost savings.

Analysts Opinions

Dow Chemical has earned a “BBB” credit rating from analysts at Morningstar. The research firm’s “BBB” rating suggests that the company is a moderate default risk. They also gave their stock a three star rating.

Also, TheStreet Ratings team rates Dow Chemical as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate Dow Chemical (DOW) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its increase in net income, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, growth in earnings per share and increase in stock price during the past year. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:-

• The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Chemicals industry. The net income increased by 40.9% when compared to the same quarter one year prior, rising from $1,049.00 million to $1,478.00 million.

• The debt-to-equity ratio is somewhat low, currently at 0.89, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.21, which illustrates the ability to avoid short-term cash problems.

• Dow Chemical has improved earnings per share by 49.4% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, Dow Chemical reported lower earnings of $2.86 versus $3.61 in the prior year. This year, the market expects an improvement in earnings ($3.00 versus $2.86).

• DOW, with its decline in revenue, slightly underperformed the industry average of 14.1%. Since the same quarter one year prior, revenues fell by 14.4%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

The company has also been the subject of a number of other research reports:-

• A recent analyst activity consisted of Susquehanna reiterating their Neutral stance on April 28. Susquehanna increased their price target on DOW from $48 to $52. This corresponds to a 0.68% upside from the last closing price. On the date of report, the stock closed at $51.82.

• Jefferies reiterated their Buy stance on April 27, and increased their price target on DOW stock from $48 to $50. This corresponds to a 3.19% downside from the last closing price. On the date of report, the stock closed at $51.47.

• Another research firm was Citigroup who reiterated their Buy stance on April 24. Citigroup increased their price target on Dow Chemical Co from $52 to $57. This translates to a 10.36% upside from the last closing price. On the date of report, the stock closed at $51.12.

There are currently twenty-six analysts that cover DOW stock. Of those twenty-six, thirteen have a Buy rating, eleven have a Hold rating and two have a Sell rating. On a consensus basis this yields to an Overweight rating. The consensus target price stands at $54.67.

Conclusion

Dow remains actively focused on seeking opportunities to optimize its portfolio by selectively spinning off or selling its underperforming assets and gradually shift focus to high-growth markets. The latest actions that are in sync with this strategy have been devised to beef up its organizational effectiveness, which will also help drive profits from this option trade.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the DOW Sep 2015 50.000 call (DOW150918C00050000) at or under $3.20, good for the day. Place a protective stop loss at $1.20 and a pre-determined sell at $6.50.



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Options traders win because they are successful.



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