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An Easy Way to Get Cash-Rich This Year: The Dow Chemical Company (DOW), Huntsman Corporation (HUN), Chemtura Corp (CHMT)

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The Dow Chemical Company (NYSE:DOW)When the going gets tough, the tough get going. It couldn’t get more apt for The Dow Chemical Company (NYSE:DOW). With core markets witnessing a lull, the chemical baron is working harder to push up margins. Or let me interpret it this way. When things are not moving, Dow wants to let go of stuff that is getting hard to handle.

After deciding to do away with 5% of its workforce and pull the shutters down on several plants, Dow now plans to shelve some assets that do not seem to fit its bill anymore. Is this divestment worth attention? If yes, what’s in it for you?

Not the first

2012 was a dull patch for the diversified chemicals industry. With growth hard to come by, most players are taking time out to restructure and align operations to taper costs and perk up margins. Several similar announcements already poured in from E I Du Pont De Nemours And Co (NYSE:DD) and Huntsman Corporation (NYSE:HUN) in recent months.

DuPont is doing away with 1,500 employees over the next year and recently sold off its performance coatings (auto paints) business in a $4.9 billion deal. Huntsman Corporation (NYSE:HUN) spent a major part of 2012 hauling up its two loss-making businesses – advanced materials and textile effects. While this restructuring is in progress, Huntsman Corporation (NYSE:HUN) is already drawing up plans to scale down its pigments business in the years to come. Clearly, cost cutting has caught everyone’s fancy.

It was coming

Two of The Dow Chemical Company (NYSE:DOW)’s businesses, which are parts of its two largest divisions — performance materials and performance plastics – will be put up on sale. The two divisions accounted for 50% of The Dow Chemical Company (NYSE:DOW)’s total sales last year. Polypropylene (a plastic polymer) and plastic additives (used in automotive, construction, consumer goods, and other industries) units should be out of Dow’s home over the next year and a half.

Dow was increasingly getting fidgety about its plastics portfolio for a couple of years, and had already sold off a major portion of its polypropylene business to Brazil-based petrochemical major, Braskem SA in 2011. Dow’s performance plastics segment, of which polypropylene is a part, was among the worst performers last year with an 11% dip in revenue.

Likewise, sales at The Dow Chemical Company (NYSE:DOW)’s plastic-additives inclusive performance materials division slipped over 5% in the fourth quarter with full-year revenue down about 7%. Chemtura Corp (NYSE:CHMT), the world’s leading additives maker, witnessed softer global demand in its last quarter as well. Sales in its additives business slipped 5% last year on lower volumes. So this business is on soft grounds, and Dow might be doing just right hiving it off.

A workable idea

The idea behind the moves is to focus on better profit businesses. Interestingly, the two largest divisions are also among the best margin generators. Even with a low key business like polypropylene, performance plastics tops when it comes to margin generation — It alone accounted for 54% of Dow’s total EBITDA last year. More than 40 new products were launched and sales for elastomers (rubber) hit a record high in 2012. A new facility is already on its way in the U.S.

The story is similar with The Dow Chemical Company (NYSE:DOW)’s performance materials business, which is second largest after plastics. It generated around 12% EBITDA margin over the past four quarters, but Dow has a target of up to 18% in the near future. As low-profit units are chucked out, target margins should be easily attainable.

It’s not surprising then that as the largest divisions, these two are drawing plenty of attention from Dow. In fact, the biggest chunk of funds is going into them. So alongside divesting, investing is also full on for these divisions. Among the biggest projects are ethylene and polyurethanes capacities ramp up.

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