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Dow Chemical (DOW): Another Earnings Beat in The Cards?

Dow ChemicalDOW is set to release its third-quarter 2015 results ahead of the bell on Oct 22.

Last quarter, the U.S. chemical kingpin delivered a 12.35% positive earnings surprise on strong margins in its performance plastics business. But its sales missed expectations, hurt by currency headwinds stemming from a stronger dollar and lower oil prices .

As Dow's products are used in almost every industry, its third-quarter results will provide color on demand trends for chemical products across a bevy of industries.

Dow has beaten the Zacks Consensus Estimate in the trailing 4 quarters with an average beat of 13.13%. Is the company poised for another winning quarter? Let's see how things are shaping up for this announcement.

Factors to Watch For

Dow, in its second-quarter 2015 call, said that, it expects strength in construction, packaging and automotive markets to more than offset weakness in agriculture and energy-related markets. It remains focused on executing its growth actions as well as portfolio management and productivity initiatives amid a still challenging operating backdrop.

Dow is expected to continue to gain from its productivity and growth actions. The company expects to generate around $300 million savings from these initiatives by end-2015.

However, currency and pricing headwinds are expected to continue to affect the company's businesses in the September quarter. Higher spending associated with turnaround activities may also put some pressure on margins in the to-be-reported quarter.

Dow is seeing weakness in the energy market, stemming from reduced oil prices. Lower oil prices may also lead to constricted margins for ethane-based plastics and affect volumes. The company saw pricing pressure associated with reduced oil prices in the second quarter, which may continue in the September quarter.

Weak commodity prices also remain a headwind for the company's agriculture business. This coupled with currency impact may continue to affect sales in this business in the third quarter.

However, strong industrial coating applications should continue to support volumes in Dow's building and construction business. Moreover, the company's productivity and pricing actions are expected to lead to expanded margins in its performance materials and chemicals franchise.

Dow is selectively spinning off or selling its underperforming assets and gradually shifting to high-growth markets. The company recently wrapped up the separation of a major portion of its chlorine value chain and merger of those businesses with chemical maker Olin Corp. OLN . The tax-efficient consideration value of the transaction is $4.6 billion.

The disposal of the chlorine assets represents a significant part of Dow's aggressive portfolio management actions as it is looking to move away from cyclical commodity chemicals businesses.

With the chlorine transaction, Dow has surpassed its earlier stated target to dispose $7 billion to $8.5 billion of non-strategic assets by mid-2016, with aggregate pre-tax proceeds from divestments now approaching more than $12 billion. The transaction also enables Dow to return $1.5 billion in value to shareholders, thus effectively completing $6.5 billion of its $9.5 billion share repurchase authorization.

Dow also remains committed 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, in July, said that is expects higher spending related to the Sadara project in the third quarter.

Earnings Whispers

Our proven model does not conclusively show that Dow is likely to beat the Zacks Consensus Estimate in the third quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: ESP for Dow is +2.94%. This is because the Most Accurate estimate stands at 70 cents, while the Zacks Consensus Estimate is pegged at 68 cents.

Zacks Rank: Dow's Zacks Rank #4 (Sell) when combined with a positive ESP makes surprise prediction difficult.

Note that stocks with Zacks Rank of #1, 2 and 3 have a significantly higher chance of beating earnings. Conversely, the Sell rated stocks (#4 and 5) should never be considered going into an earnings announcement.

Stocks That Warrant a Look

Here are some other companies in the basic materials space you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

The Chemours Company CC has an Earnings ESP of +6.90% and a Zacks Rank #3 (Hold).

Commercial Metals Company CMC has an Earnings ESP of +4.65% and a Zacks Rank #3 (Hold).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

DOW CHEMICAL (DOW): Free Stock Analysis Report

OLIN CORP (OLN): Free Stock Analysis Report

COMMERCIAL METL (CMC): Free Stock Analysis Report

CHEMOURS COMPNY (CC): 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.


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

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