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E I Du Pont De Nemours And Co (DD), Corning Incorporated (GLW): Is The Dow Chemical Company (DOW) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does The Dow Chemical Company (NYSE:DOW) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell The Dow Chemical Company (NYSE:DOW)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: are profits, margins, and free cash flow all increasing?
2). Valuation: is share price growing in line with earnings per share?
3). Opportunities: is return on equity increasing while debt to equity declines?
4). Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at The Dow Chemical Company (NYSE:DOW)’s key statistics:

DOW Total Return Price Chart

DOW Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 9.6% Fail
Improving profit margin 26.6% Pass
Free cash flow growth > Net income growth 503.7% vs. 38.8% Pass
Improving EPS 32.2% Pass
Stock growth (+ 15%) < EPS growth 78.5% vs. 32.2% Fail

Source: YCharts. * Period begins at end of Q2 2010.

DOW Return on Equity Chart

DOW Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 23.5% Pass
Declining debt to equity (22.5%) Pass
Dividend growth > 25% 113.3% Pass
Free cash flow payout ratio < 50% 43.3% Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going

The Dow Chemical Company (NYSE:DOW) put together a really strong performance, earning seven out of nine passing grades, but missing an eighth due to sluggish revenue growth over the past three years. Dow’s shareholders have enjoyed solid growth over the past few years, but its share price has outpaced the growth of its bottom line lately. All in all, Dow looks quite solid, but can the company keep up its progress? Let’s dig a little deeper to find out.

Fool contributor John Miller notes that Dow produces about 20% of the world’s ethylene oxide, and over the past few years, demand for ethylene oxide has grown 5% to 6% every year, and that could increase further if and when emerging markets shake off their doldrums. Dow has also been looking to generate more revenue from its agricultural segment — in the first quarter, Dow’s Agricultural Sciences division reported a 14% growth in revenues. The company is shifting away from several legacy chemicals businesses in the meanwhile, and has divested weaker lines for a total of $8 billion over the past few quarters. My fellow Fool Dan Caplinger notes that Dow has been trying to keep the recent flood of natural gas produced in the United States in the United States, as this input is much lower-priced domestically than it is in much of the rest of the world. If this edge evaporates, Dow may wind up trimming down its product lines even further.

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