Dow Chemical (DOW) shares maybe trading at a nine-year high, but analysts don't see them pausing for a breath anytime soon. Wells Fargo upgraded its rating on the chemical giant to outperform from market perform earlier this week, raising its price target to $54-$56 from an earlier range of $48-$52. That's 12% upside at the higher end from the stock's current price of around $50, meaning Dow Chemical could top its all-time high in near months.

But is it just the strong petrochemical business fundamentals that are catching analysts attention -- Jeffries also upped its price target on Dow's close competitor and plastics major LyondellBasell (LYB -0.72%) to $110 the same day – or is Dow Chemical up to something big that investors aren't aware of?

Source: Company website

What is Wells Fargo betting on?
Encouraged after a meeting with Dow Chemical management, analyst Frank J. Mitsch raised his 2014 earnings per share (adjusted) estimates on the company by $0.10 to $2.85. That represents a solid 15% improvement over Dow's 2013 earnings. More notably, Mitsch pegs the company's EPS to hit $3.50 by 2015 as benefits from its major expansion programs start flowing in.

Dow's performance plastics business, which is also its largest, is top on every analyst's mind. Here are some statistics worth noting:

  • In Q1, sales from Dow's performance plastics business climbed 3% year over year, but its earnings before interest, taxes, depreciation, and amortization, or EBITDA, inched up 5%.

  • The division contributed a whopping 42% to Dow's Q1 EBITDA despite contributing only a quarter to total sales.

  • The business ended 2013 with an EBITDA margin of 28% -- the highest among all of Dow's businesses, and five percentage points higher than the second-best performing division, electronics and functional materials.

Small wonder, then, that Dow Chemical is leaving no stone unturned in exploiting the feedstock advantage opportunity. And small wonder, then, that analysts are excited about the prospects, especially as importannt projects are on track to go online by as early as next year. Here's a quick snapshot of Dow's key ongoing projects that have the potential to take its high-margin performance plastics, and other complementary businesses, to never-before-seen heights.

 

Source: Company presentation at the Goldman Sachs Chemical Intensity Days Conference held in March

Dow is clearly going big on ethylene capacity. The reason is simple: Ethylene, the key input for its plastics business, is derived from natural gas component ethane. With gas prices easing, the cost of producing ethylene from ethane has nearly halved since 2010, giving companies like Dow Chemical and LyondellBasell the perfect opportunity to expand.

Overall, Dow's growth initiatives, as highlighted in the chart above, are projected to add as much as $3 billion to its EBITDA over the next few years. For perspective, Dow earned $8.4 billion in adjusted EBITDA in 2013, with the biggest gains coming from its plastics business. And it's worth noting that strong accretive earnings potential from Sadara and Freeport PDH programs was what encouraged Wells Fargo to improve its 2015 earnings outlook for Dow to $3.50 from $3.20 a share.

Firing on all cylinders
There's no questioning the massive growth potential that Dow Chemical's plastics business has. But the best part is that this is just one of the inspiring aspects about the company. While it's beyond the scope of this article to discuss everything in length, here are some interesting facts that should encourage you to get Dow Chemical stock on your radar:

  • Dow's agricultural sciences business has doubled in value over the past six years. The successful launch of its Enlist E3 soybeans by 2015 could be worth $1 billion in terms of net present value.

  • Dow is a major player in the semiconductor, smart mobile devices, and OLED markets through its electronics and functional materials business. The company pegs just the OLED market to be a $1.5 billion to $2 billion opportunity.

  • Dow's coatings and infrastructure solutions business is well poised to grow with increasing construction activity in the U.S. and elsewhere. The division reported the highest growth in adjusted EBITDA among all segments for the six months ended March 31, 2014.

  • Dow hopes to free up $4.5 billion to $6 billion by shedding unprofitable assets and right-sizing parts of its portfolio by the end of next year. A good part of that extra cash should end up in shareholders' pockets.

  • Dow increased its first-quarter dividend by 15% in the last quarter and plans to repurchase shares worth a whopping $4.5 billion by the end of this year.

I could go on and on, but for now, the above factors should be enough to justify the recent rally in Dow Chemical stock. And analysts that are placing bigger bets on the stock aren't wrong – For all those growth catalysts and 3% current dividend yield, Dow shares are trading at under 13 times earnings. That's reasonably cheap, and you certainly can't go wrong with this stock.