U.S. chemical kingpin
The Dow Chemical Company
(
DOW
) posted mixed third-quarter 2012 results and its profit slid on
lower pricing across all regions. The company saw weak demand for
its products in the quarter, largely stemming from the
recessionary conditions in Europe.
Third Quarter Revisited
The Michigan-based company earned 42 cents a share in the
third quarter, down from 69 cents (or 62 cents excluding items)
posted a year ago. That, however, trumped the Zacks Consensus
Estimate of 37 cents. Dow's profit slid 39% year over year to
$497 million as lower pricing dented its sales in the
quarter.
Revenues dipped 9.7% (or 7% on an adjusted basis) year over
year to $13,637 million, missing the Zacks Consensus Estimate of
$14,130 million. Sales fell across all segments except
Agricultural Sciences, which was the only bright spot in the
quarter. Revenues in Europe slipped 10%, largely due to
unfavorable currency translation.
Volumes nudged down 1% year over year (up 2% on an adjusted
basis) in the quarter. On an adjusted basis, the company saw
volume gains across all geographic regions. Price fell 9% in the
quarter with declines witnessed across the globe, especially in
Europe and China.
We have discussed the quarterly results at length here:
Dow's 3Q Mixed, Snipping Jobs.
Agreement - Estimate Revisions
Estimates for Dow have been inclined towards the negative side
following the company's third quarter results. Out of 13 analysts
covering the stock, 9 have slashed their estimates for the fourth
quarter over the past 30 days with 2 moving in the opposite
direction. No movement was witnessed over the past week.
For 2012, 8 (out of 18) analysts have trimmed their estimates
over the past 30 days while 6 have raised the same. Similar to
the fourth quarter, there were no revisions in either direction
over the last 7 days.
The bearishness appears to reflect the concerns about the U.S.
and European economies, slowdown in Asia and the weak pricing
environment, which may continue to be a drag on the company's
results.
Magnitude - Consensus Estimate Trend
Given the directional pressure from a string of downward
revisions, estimate for the fourth quarter has gone down by 4
cents over the past month while remaining stationary (at 33 cents
a share) over the past week. For 2012, there has been a decrease
of a penny and 6 cents in the estimate over the past 7 and 30
days, respectively. The current Zacks Consensus Estimate for 2012
is $1.89 per share, representing an estimated decline of roughly
25%
Our View
Dow, in its third quarter call, noted that it will focus on
maximizing shareholder value and invest in areas which can
deliver incremental margins. The company will continue to pursue
its cost reduction and efficiency programs to cope with the
sluggish macroeconomic environment.
The company, under a newly announced restructuring program, is
trimming its global headcount by 5% and shuttering 20 of its
manufacturing plants. It further plans to cut capital spending
and investment on certain growth programs that have low priority.
When combined with the $1.5 billion existing cost-cutting
measures, the company's new actions are expected to collectively
deliver cost savings of $2.5 billion.
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 its 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 is
aggressively pursuing its cost-reduction initiatives under the
"Efficiency for Growth" program initiated in 2011.
However, Dow continues to witness slowing economic activity,
largely due to the beleaguered economic conditions in Europe.
Moreover, high unemployment is hindering economic recovery in the
U.S. and activity in China and other emerging markets remain
sluggish. All these factors are contributing to a weak demand for
the company's products, something which may continue into the
fourth quarter.
Moreover, weakness in the electronics and construction
end-markets may continue in the fourth quarter. Building and
construction sales remain under pressure due to lower volume in
Europe and recovery in electronics remains slow, partly due to
sluggish growth China. Moreover, currency headwinds are expected
to continue given the weak euro.
Dow, which competes with
EI DuPont de Nemours & Co.
(
DD
), currently holds a short-term Zacks #3 Rank (Hold). We have a
long-term Neutral recommendation on the stock.
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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