Dow Chemical Rallies as Earnings Trump Estimates - Analyst Blog

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Dow Chemical ( DOW ) swung to a profit in fourth-quarter 2013 on healthy gains across agriculture, coatings and plastics businesses, backed by strength in emerging markets. The company's shares shot up on better-than-expected top and bottom line numbers and its announcement of a dividend hike.

The biggest U.S. chemical maker by sales logged profit of $963 million or 79 cents per share in the quarter, a turnaround from a loss of $716 million or 61 cents per share registered a year ago. Results in the year-ago quarter were hurt by restructuring charges of $990 million.

Barring one-time items (including costs associated with restructuring program, impairment charges and one-time gains), Dow earned 65 cents per share in the quarter, a 97% rise from 33 cents earned a year ago. That trounced the Zacks Consensus Estimate by 22 cents.

Revenues went up roughly 3% year over year to $14,386 million in the reported quarter as gains across agricultural sciences, coatings, performance plastics and electronics more than offset a decline in feedstocks and energy. Sales were ahead of the Zacks Consensus Estimate of $14,157 million.

For full-year 2013, profit (as reported) rocketed more than five-fold year over year to $4,447 million or $3.68 per share from $842 million or 70 cents a year ago. Adjusted earnings of $2.48 per share topped the Zacks Consensus Estimate of $2.27.

Revenues for the year inched up 1% year over year to $57,080 million, also beating the Zacks Consensus Estimate of $56,930 million. Emerging markets accounted for 35% of annual sales for the first time in the company's history.

Separately, Dow raised its quarterly dividend by 15% and tripled its share repurchase program. The Michigan-based company's shares were up as much as roughly 8.5% in pre-market trading. The stock is up roughly 30% so far this year.

Dow's shares rallied last week after activist investor Dan Loeb's Third Point hedge fund bought a major stake in the company for roughly $1.3 billion, marking the entity's biggest investment yet. However, Third Point wants Dow to spin off its sluggish petrochemicals business and focus instead on high-margin, fast-growing businesses.

Volume and Pricing

Price edged up 1% year over year in the quarter as gains across performance plastics and performance materials were mostly offset by decline in feedstock and energy. Volume rose 2% in the quarter as the company saw gains across most geographic regions and business segments. Emerging markets led volume gains in the quarter with Latin America recording a double-digit rise.

Segment Analysis - Agriculture Leads the Pack

Electronic and Functional Materials


Revenues rose 3% year over year to $1.1 billion in the reported quarter on higher volume across Asia Pacific and North America. Sales of OLED materials and interconnect technologies rose on higher customer demand for mobile devices, offsetting weaker demand for semiconductor technologies. Functional materials sales rose on higher demand in energy and home care sectors.

Coatings and Infrastructure Solutions

Sales went up 10% to $1.7 billion in the quarter on higher volume and pricing. Sales gains were recorded across North America, EMEA and Asia Pacific. Building and construction sales rose on higher demand across the board. Coating materials sales were boosted by strong demand in architectural and industrial coatings.

Agricultural Sciences

The segment once again recorded the biggest gain with sales rising 13% year over year to a fourth-quarter record of $1.8 billion, benefiting from double-digit gains across North and Latin America. Crop protection products revenues rose 11% riding on higher sales of herbicides across North and Latin America and insecticides in Latin America.

New crop protection revenues jumped 23%. Sales of seeds, traits and oils climbed 20% on higher market demand for quality germplasm and stacked traits in Latin America.

Performance Materials

Revenues edged up 1% to $3.4 billion on flat volume and a modest rise in price. Polyglycols, surfactants and fluids registered double-digit sales gains on healthy demand for deicing fluids in North America. Strong demand in the exploration market led to higher oil, gas and mining sales in the quarter.

Propylene oxide/propylene glycol sales rose on strength in home and personal care products markets and increased production capacity in Asia Pacific. Automotive systems gains were led by strength in transportation fundamentals and gains in structural adhesives.

Performance Plastics

Sales went up 5% to $3.9 billion in the quarter, aided by double-digit gains across North America, Asia Pacific and Latin America. Packaging and specialty plastics sales were higher across all regions barring Europe which was impacted by the closure of a plant in Belgium. Flexible food and specialty packaging sales were higher in the quarter.

Sales rose across elastomers and electrical and telecommunications businesses in the quarter. Elastomers revenues were boosted by strong demand in transportation markets.

Feedstocks and Energy

The segment was once again the weakest link with revenues falling 6% to $2.4 billion on flat volume and lower pricing. Lower aromatic prices within hydrocarbons led to the decline in price.

Balance Sheet and Shareholder Returns

Dow ended 2013 with cash and cash equivalents of roughly $5.9 billion, up 38% year over year. Total long-term debt declined roughly 15% year over year to around $17.5 billion.

Dow pared gross debt worth roughly $3 billion during 2013 including around $660 million in the fourth quarter. Its continued efforts to de-leverage its balance sheet led to a net debt to total capitalization ratio of 30%, lower than its historical average. The company generated operating cash flows of $2.2 billion in the reported quarter, up 38% year over year.

Dow's Board announced a 15% hike in its quarterly dividend to 37 cents per share from 32 cents per share. The company also expanded its authorized share repurchase program to $4.5 billion from $1.5 billion to be completed this year. Dow retuned $1.8 billion (including $550 million in the fourth quarter) to its shareholders in 2013 in form of dividends and share repurchases, a nearly 30% year over year rise.  

Outlook

While Dow, a Zacks Rank #4 (Sell) stock, sees favourable trends across major markets, business environment is expected to remain uncertain in the near future. CEO Andrew N. Liveris said that the company will continue to focus more on attractive end-user markets and exit non-strategic assets while retaining a strong focus on productivity improvement and cost controls.

Dow remains committed to its cost reduction and efficiency programs while reducing debt, improving cash flows and maximizing shareholder returns. The company exceeded its cost reduction target of $500 million for 2013 and recorded roughly $850 million in proceeds from non-strategic assets sale.

Dow will continue to invest in attractive regions through highly-accretive projects including the expansions in the U.S. Gulf Coast and Sadara joint venture in the Middle East. The company expects its strategic actions to drive earnings and enhance shareholder value in 2014.

Dow, which continues to face challenges in Europe, remains actively focused on seeking opportunities to optimize its portfolio by selectively spinning off or selling its underperforming assets and gradually shift focus to high growth businesses.

The company, last month, revealed its plans to exit a major portion of its chlorine business that has been in operation for over 100 years. Commodity chemicals assets that are being identified for separation represents up to $5 billion in revenues.

Dow's results shed light on demand trend for chemical products. Among other big chemical names, DuPont ( DD ), which reported yesterday, saw its profit nearly double on strength in its agriculture business.

Celanese ( CE ), which reported on Jan 23, beat revenues and earnings expectations in the fourth quarter. Eastman Chemical ( EMN ) will report its fourth-quarter results after the closing gong tomorrow.



CELANESE CP-A (CE): Free Stock Analysis Report

DU PONT (EI) DE (DD): Free Stock Analysis Report

DOW CHEMICAL (DOW): Free Stock Analysis Report

EASTMAN CHEM CO (EMN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: CE , DD , DOW , EI , EMN

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