Earnings Scorecard: Dow Chemical - Analyst Blog


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U.S. chemical kingpin The Dow Chemical Company ( DOW ) posted lackluster second-quarter 2012 results with both revenues and earnings largely missing the Zacks Consensus Estimate.

Second Quarter Hindsight

The Michigan-based company earned 55 cents a share in the quarter, falling behind the Zacks Consensus Estimate of 64 cents. Profit slipped roughly 34% year over year, pummeled by the beleaguered economic conditions in Europe and weak demand.
Revenues clipped 10% year over year to $14,513 million, also missing the Zacks Consensus Estimate of $15,961 million. Sales declined across all segments except Agricultural Sciences which achieved double-digit growth in the quarter.

Volumes declined 5% year over year (1% on an adjusted basis) in the quarter. However, the company saw gains across Agricultural Sciences and Performance Plastics divisions as wells as in Asia-Pacific. Price dipped 5% in the quarter with declines registered across the globe.

We have discussed the quarterly results at length here: Europe Hits Dow Chemical in 2Q.

Agreement - Estimate Revisions

Estimates for Dow elicit a comprehensive downward drift, reflecting its lackadaisical performance in the second quarter. Out of 12 analysts covering the stock, 10 have chopped their estimates for the third quarter over the past 30 days with none moving in the opposite direction. No movement was witnessed over the past week.

Estimates for 2012 reflect a somewhat similar trend with 16 (out of 17 analysts) slashing their estimates over the past 30 days with no upward revisions. There was 1 downward revision over the last 7 days with no reverse movements.

The bearishness appears to reflect the concerns surrounding the U.S. and European economies which may continue to impinge the company's results in the second half of the year.

Magnitude - Consensus Estimate Trend

Given the directional pressure from a host of downward revision, estimate for the third quarter has gone down by 22 cents over the past month while remaining stationary over the past week. For 2012, there has been a decrease of 4 cents and 43 cents in the estimate over the past 7 and 30 days, respectively. The current Zacks Consensus Estimates for the third quarter and 2012 are 44 cents and $2.05 a share, respectively.

Our Take

Moving ahead, Dow sees lower-than-expected recovery in global economy in second-half 2012. The company plans to beef up cost reduction and efficiency programs to cope with the challenging macroeconomic environment.

Dow is benefiting from strong fundamentals in agriculture and food markets. 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.

Dow is targeting faster-growing geographies. The company earns two-thirds of its income from outside the U.S. Growth in emerging economies has been especially fast, contributing a meaningful portion of the company's sales.

Moreover, the company continues to focus on offering incremental returns to its shareholders. It also continues debt repayments while making further investments. Moreover, Dow continues its cost-reduction initiatives under its "Efficiency for Growth" program initiated in 2011, which are expected to yield meaningful cost savings annually.

However, Dow witnessed slowing economic activity in the second quarter, largely due to the beleaguered economic conditions in Europe. Moreover, high unemployment coupled with waning consumer confidence hindered economic recovery in the U.S. Activity in China and other emerging markets also slowed in the quarter. All these factors led to a weak demand for the company's products, something which may continue into the third quarter.

Moreover, Dow contends with soft electronics and construction end-markets, which may impact its results moving ahead. Building and construction sales are declining due to lower volume in Europe. Moreover, Dow is facing challenges in Western Europe due to the recessionary conditions and expects currency headwinds to continue given the weak euro. This is reflected in our long-term Underperform recommendation on the stock.

Dow, 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/

DU PONT (EI) DE (DD): 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 Nasdaq, Inc.

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