The Dow Chemical Company ( DOW )
saw its profit sag in second-quarter 2012 hammered by the soft
economic conditions in Europe and weak demand. The Michigan-based
chemical powerhouse, whose products are used across a broad
spectrum of industries, earned 55 cents a share in the quarter.
That largely missed the Zacks Consensus Estimate of 64 cents and
significantly trailed the year ago earnings of 84 cents (or 85
cents excluding items).
Dow logged a profit of $649 million in the quarter, a roughly 34%
year-over-year skid. The company's shares fell 3.4% in pre-market
trading to reflect the miss.
The U.S. chemical kingpin 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 its products.
Unfavorable currency exchange impact added to the pain.
Dow's peer EI DuPont de Nemours & Co. ( DD )
delivered mixed second quarter results earlier this week beating on
earnings while falling short on the revenue front. Weak conditions
in Europe weighed on its results.
Revenue, Volume and Pricing
Revenues tumbled 10% year over year to $14,513 million, trailing
behind the Zacks Consensus Estimate of $15,961 million. Sales fell
across all segments except Agricultural Sciences which achieved
double-digit growth in the quarter. Revenues in Europe slid 10%,
largely due to currency headwinds.
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.
Electronic and Functional Materials
Revenues from this segment clipped 4% year over year to $1.2
billion as price and volume both declined in the quarter. Dow
Electronic Materials recorded lower sales in the quarter given a
weak electronics industry. However, the business saw volume gains
in Semiconductor Technologies.
In Display Technologies, strong growth in LED materials was
offset by lower sales in backlight film applications. Functional
Materials business posted lower sales in the quarter.
Coatings and Infrastructure
Sales dipped 6% to $1.9 billion in the quarter as price fell 6%
and volume remained flat year over year. The company's Water and
Process Solutions business reported record sales on the back of
volume gains. However, sales fell in the Dow Coating Materials
business as lower price more than offset healthy volume gains. Dow
Building and Construction business posted lower sales as volume
shrunk in Europe.
The segment registered record sales of $1.7 billion, a 12%
year-over-year surge. Volumes climbed 10% while prices rose 2%.
Crop Protection products revenues jumped 8% riding on solid growth
across North America, Latin America, and Asia-Pacific.
Revenues from Seeds, Traits and Oils business zoomed over 30%,
driven by new seed technologies. Corn business continues to see
strong demand from farmers of SmartStax hybrids in North America
and increased adoption of Herculex technology in Latin
Revenues slid 11% to $3.4 billion on account of volume and price
declines. Volumes declined across all geographies, especially in
Polyurethanes saw improved demand in Asia Pacific, offset by lower
pricing. Dow Automotive Systems reported higher pricing in most
regions, partly offset by lower demand in Latin America and EMEA.
Polyglycols, Surfactants and Fluids business recorded price
improvements North America, Asia Pacific and Latin
Revenues from Epoxy fell in the quarter. Dow Oil and Gas
delivered double-digit growth. Oxygenated Solvents revenues were
dragged down by supplier production issues in Asia-Pacific and soft
demand in coating and electronic markets.
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Sales fell 6% to $3.7 billion in the quarter as price decline more
than offset volume gains. Dow Elastomers delivered record results
and registered double-digit growth in North America, Asia-Pacific
and Latin America.
Electrical and Telecommunications business posted higher sales
with double-digit volume gain in Asia-Pacific. Revenues fell in
Performance Packaging, in part, due to price decline across the
Feedstocks and Energy
The division witnessed a 10% year-over-year decline in sales due
to lower volume and price. The Chlor-Alkali/Chlor-Vinyl business
posted lower sales, hurt by weak demand for vinyl chloride monomer.
Ethylene Oxide sales increased in the quarter on better pricing,
but Ethylene Glycol revenues fell due to soft demand. Strong demand
for Caustic soda was witnessed in the quarter.
Dow exited the quarter with cash and cash equivalents of $4.1
billion, up 86% year over year. Total long-term debt increased 5%
year over year to roughly $20.2 billion. Net debt-to-capitalization
ratio reduced to 40.4% from 41.6% a year ago.
Outlook and Recommendation
Looking 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 deal with the challenging
Dow is benefiting from strong fundamentals in agriculture and food
markets. However, weakness in the electronics and construction
end-markets may linger moving ahead. 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, which is in sync with a short-term Zacks #3 Rank