Earnings Scorecard: Dow Chemical - Analyst Blog

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Chemical major Dow Chemical ( DOW ) started 2012 with mixed results in the first quarter, beating the Zacks Consensus Estimate on earnings while lagging behind on the revenue front.

Highlights from the Quarter

The Michigan-based company logged adjusted (excluding one-time charges) earnings of 61 cents a share in first-quarter 2012, which topped the Zacks Consensus Estimate 59 cents while falling below the year-ago adjusted earnings of 82 cents.                

Profit (as reported) slid 34% year over year to $412 million (or 35 cents a share), hit by restructuring charges of roughly $357 million associated with plant closures and downsizing.

Revenues fell narrowly year over year to $14,719 million, missing the Zacks Consensus Estimate of $15,342 billion. Healthy growth across agricultural and feedstock/energy businesses were neutralized by declines in performance materials and performance plastics franchises.

Volumes declined 1% year over year, but were up 3% barring the impact of divestitures. On an adjusted basis, the company saw gains across Europe, Middle East and Africa (EMEA) and North America and declines in Latin America and Asia Pacific.

We have discussed the quarterly results at length here: Dow's Profit Sags on Charges.

Agreement - Estimate Revisions

Estimates for Dow for the second quarter and current fiscal have been weighted on the negative side following the first quarter results. Out of 12 analysts covering the stock, 8 have lowered their estimates for the second quarter over the past 7 days with just 1 moving in the reverse direction. Likewise, over the past month, 8 analysts have lowered their forecast for the quarter with 2 raising their estimates.

Estimates for fiscal 2012 reflect a somewhat similar trend with 8 (out of 16 analysts) chopping their estimates over the past 7 days with a couple of upward revisions. Over the last 30 days, there were 8 downward revisions coupled with 4 reverse movements.

The bearishness appears to partly reflect the concerns surrounding the U.S. and European economies and the impact of the company's planned turnaround costs, which it expects to increase by $100 million sequentially in the second quarter.

Magnitude - Consensus Estimate Trend

Given the downside pressure from the negative revisions, estimate for the second quarter has gone down by 8 cents and 6 cents over the last week and month, respectively. For fiscal 2012, there has been a decrease of 5 cents and 3 cents in the estimate over the past 7 and 30 days, respectively.

Neutral on Dow Chemical

Moving ahead, Dow believes economic recovery will gain momentum in the second quarter and the remainder of 2012. The company sees an improving U.S. economy citing tailwind from the nation's rich access to low-cost natural gas.

Dow is benefiting from strong fundamentals in agriculture and food markets. The company's performance in the emerging markets remains strong and we expect this to continue moving ahead. A string of innovative products in its pipeline also adds to its strength. The company's expanding technology pipeline is expected to fetch a $2 billion opportunity by 2015. The company is also witnessing continued increase in operating rates.

Dow expects its downstream, market-driven businesses to continue to capture value from improving North American feedstock dynamics. It anticipates the favorable trend in the ethylene industry to continue. The company's strategic initiatives (including technology licensing deals) are expected to boost ethylene production capabilities by roughly 20% in the U.S. over the next three years, offering significant opportunity for margin expansion.

Moreover, Dow continues to focus on cost containment initiatives, generate enough cash flows and maximize returns to shareholders. The company recently announced that it will be cutting costs owing to weak demand of its products in Europe. As a part of the move, the company is closing its manufacturing facilities in Europe, North America and Latin America.

Separately, Dow plans to lay off 900 workers as part of its previously announced cost-reduction efforts and its "Efficiency for Growth" program initiated in 2011. It expects to save roughly $250 million annually from these measures.

However, Dow is witnessing softness in the electronics and construction end-markets, which may weigh on its second-quarter 2012 results. The construction market in Europe remains soft. Moreover, the company will continue facing challenges in Western Europe due to weak demand and the sovereign debt crisis.

We currently have a long-term Neutral recommendation on Dow Chemical. The company, which competes with EI DuPont de Nemours & Co. ( DD ), currently holds a short-term Zacks #3 Rank (Hold).

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These "Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/


 
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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 , Stocks

Referenced Stocks: DD , DOW , EI

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