* 4Q In Line: Dow reported $1.02 to finish the year, roughly in line with the Street. Sales are up 9%, and the specialty performance businesses are now more than half the earnings of Dow. Most impressive is the nearly 40% profit gain in Performance Plastics, despite raw material pressure. Dow outperformed more commodity peers this quarter as well.
* Outperforming Industry: Strong pricing is passing through raw material costs much better than competitors we track. Hurricane impacts were much less at Dow as well, and costs are under excellent control. Dow should provide leadership going forward.
* Trim 2006, But On Way to 2-Year Peak - $6.50 in 2007E: We trim this year by 35 cents due to higher input costs, but all trends indicate that our above consensus $5.65 is achievable this year. Debt pay down has been aggressive to help as well. We should see leverage in the ethylene chain, still high free cash from the chlorine chain, and specialties should maintain high margins. we introduce a $6.50 for 2007, the end of a two-year presumed peak.
* Valuation: Maintain $60 Target: We are maintaning our price target at $60, as Dow usually achieves 10x peak EPS. This is also a slight premium to the smaller cap and more leveraged peer group, we feel warranted given Dow's superior balance sheet, growth, returns and liquidity.