Billionaire hedge fund manager Dan Loeb compared The Dow Chemical Company (NYSE:DOW) and LyondellBasell Industries NV (NYSE:LYB) in his latest investor letter. Dan Loeb is an activist hedge fund manager who previously had a very successful campaign at Yahoo! Inc. (NASDAQ:YHOO). He wasn’t the first hedge fund manager targeting Yahoo! Inc. (NASDAQ:YHOO) but he was the first one who was able to more than double his investment.
According to Dan Loeb The Dow Chemical Company (NYSE:DOW) has a flawed accounting system. The company’s Petrochemical business is under-earning $2.5 billion compared to LyondellBasell Industries NV (NYSE:LYB). This is because the unit sells its products at cost to Dow Chemical’s downstream businesses. Loeb suggests that Dow Chemical should use “market based transfer pricing methodology across and within all segments so shareholders can clearly understand each business unit’s underlying profitability”.
Dan Loeb calculates that The Dow Chemical Company (NYSE:DOW) has larger upstream capacity than LyondellBasell and it is engaged in several downstream derivatives. Yet, its sales is only 20% more than LyondellBasell’s sales and its EBITDA is actually 12% smaller. LyondellBasell generates $2.49 million in revenue per employee and $0.44 million in EBITDA/employee whereas Dow Chemical generates only $1.15 million in revenue/employee and $0.15 million in EBITDA/employee.
Dan Loeb argues that Dow Chemical uses misleading benchmarks and has poor returns and poor capital allocation. Here is how he concludes his analysis:
“Harnessing the full potential of Dow’s petrochemical assets will take time as it could require a combination of closures, modifications, brownfield investments, and divestitures. Our suggestion to management is to recognize that Dow is involved in numerous commoditizing derivative products and to make a more clear‐cut delineation between low‐cost feedstock and downstream value‐add related profitability. We have urged management to embrace the fact that it is running one of the world’s largest commodity petrochemical businesses, which historically has been a challenge. Conducting an operational review (with market price based raw material transfers) will undoubtedly result in increased scrutiny as to the specialty nature of some of Dow’s petchem business units. This acknowledgement and the subsequent review are crucial to becoming a best‐in‐class, low‐cost petrochemical operator. After a decade of underperformance, shareholders deserve greater transparency and a comprehensive reassessment of Dow’s strategy. We appreciate management’s engagement with all of its shareholders, and look forward to furthering discussions regarding strategy and capital allocation in the pursuit of maximizing Dow’s great potential.”
Do you think The Dow Chemical Company (NYSE:) is a better investment than LyondellBasell Industries NV (NYSE:LYB)?
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