None of the major stock market indexes performed well in 2022. Yet, of the three most commonly measured indexes (The Dow Jones Industrial Average, The Nasdaq Composite, and The S&P 500), the Dow Jones Industrial Average fared best. It finished the year down “only” 4%, while the S&P 500 and Nasdaq Composite fell 18% and 33%, respectively.
Let’s take a closer look at one component of the Dow Jones Industrial Average that looks like a smart buy in 2023: Dow Inc (DOW 0.08%).
A poor quarter, but are macro tailwinds on the way?
Dow reported its fourth-quarter earnings results on Jan. 26. On the face of it, the report was a bad one. Revenue fell 17% year over year to $11.9 billion, below analyst estimates of around $12 billion. Earnings, too, were lower than expected, coming in at $0.46 per share — $0.12 a share below estimates.
There were, however, bright spots for the company. Cash flow from operations increased from $7.1 billion in 2021 to $7.5 billion in 2022, despite operating earnings before interest, taxes, depreciation, and amortization (EBITDA) decreasing from $12.4 billion to $9.3 billion over the same period.
What’s more, Dow has worked to stabilize and strengthen its overall capital position. Net debt has decreased to $10.6 billion, after peaking at over $15 billion in 2019. Underfunded pension obligations have also been cut to $2.5 billion, down from $7.8 billion four years ago.
At any rate, despite its best efforts, Dow has suffered from a challenging macroeconomic environment. To thrive, Dow needs strong global demand for big-ticket items like houses, automobiles, and airplanes. Weak economic growth from China and Europe, coupled with a strong U.S. dollar and high commodity prices, hit Dow where it hurt in 2022. However, when those trends reverse, as they eventually will, Dow should reap the benefits.
Is Dow a buy now?
In general, stocks that report poor quarterly reports don’t get much attention. After all, turnaround stories aren’t very sexy. Yet, turnaround stocks shouldn’t be ignored. In the case of Dow, the company is attractive on a number of levels.
First, its modest price-to-earnings ratio of 7.5 is mouth-watering for value investors looking to snap up an unloved business that could bounce back when the macro environment improves.
Second, investors will get paid to wait. Dow pays $2.80 per share in annual dividends — good for a 4.8% yield. In addition, management announced a bevy of steps to rein in costs and improve earnings for 2023. Dow will cut 2,000 jobs (5% of its workforce), reduce spending on raw materials, and shutter high-cost facilities.
Smart investing is all about recognizing a stock’s true value — whether it’s loved or not. And to me, Dow looks like a turnaround story that’s worth loving.
Jake Lerch has positions in Coca-Cola and Walt Disney. The Motley Fool has positions in and recommends Microsoft and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long January 2024 $47.50 calls on Coca-Cola, and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.