Dow Chemical (DOW) Q4 Earnings: Stock to Post a Beat Again?

Dow ChemicalDOW is scheduled to report its fourth-quarter 2016 results ahead of the bell on Jan 26.

Last quarter, the U.S. chemical kingpin delivered a 13.75% positive earnings surprise, helped by its productivity and cost-cutting actions. However, the company saw its profits tumble roughly 44% year over year, hurt by charges associated with the Dow Corning ownership restructure. Sales rose year over year on higher volumes, and beat expectations.

Dow has beaten the Zacks Consensus Estimate in all of the trailing four quarters with an average beat of 16.40%. Is the company poised for another winning quarter? Let's see how things are shaping up for this announcement.

Dow Chemical Company (The) Price and EPS Surprise

Dow Chemical Company (The) Price and EPS Surprise | Dow Chemical Company (The) Quote

Factors to Watch For

Dow, in its last earnings call, said that it sees steady growth in North America and Europe and expects strength of the consumer and emphasis on growth in Southeast Asia and second-tier cities in China to continue to boost its results in Asia Pacific. Dow also expects sustained strong growth fundamentals in its core markets of packaging, automotive and construction.

Dow has modestly outperformed the Zacks categorized Chemicals-Diversified industry over a year. The company's shares have gained around 35.5% over this period, compared with roughly 35% gain recorded by the industry.

Dow should continue to gain from its productivity improvement and cost control actions in the fourth quarter. The company remains on track to deliver $1 billion of cost reduction under its three-year productivity program. Dow achieved $76 million in productivity savings during the third quarter. The company expects to surpass its cost savings goal of $300 million for full-year 2016.

Dow should also gain from the synergies associated with Dow Corning Silicones business. Dow has taken full control of Dow Corning - earlier a 50-50 joint venture between Dow and Corning Inc.

Dow expects to achieve combined run rate annual synergies of $500 million from the restructured ownership in Dow Corning, consisting of $400 million in cost synergies and $100 million in growth synergies. The company also expects to realize $1 billion in annual EBITDA synergies. Dow is taking a number of actions (including closure of silicones manufacturing plants in Greensboro, NC, and Yamakita, Japan) to attain synergies from the restructuring of its ownership in Dow Corning.

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's propane dehydrogenation unit (PDH) in Freeport, TX started commenced commercial operations in Dec 2015 and is now operating at full capacity. The PDH unit represents a major part of Dow's roughly $4 billion U.S. Gulf Coast investments. Dow is also making progress with the construction of the new ethylene cracker that is on track to be operational by mid-2017.

However, Dow is facing challenges in its agriculture business. While Dow's agriculture business witnessed a healthy third-quarter 2016, the company expects headwinds in the agriculture market to persist in the fourth quarter.

The agriculture market is not out of the woods and remains affected by depressed farm commodity prices (leading to lower farm income). While Latin America is showing signs of improvement of late, agricultural market conditions still remain sluggish in that key region, particularly in Brazil. Dow's crop protection volumes are expected to remain under pressure in the December quarter.

Dow is also seeing weakness in the energy market, stemming from the still depressed oil price environment that is hurting oil and gas exploration project demand. Moreover, the company is exposed to currency headwinds. Unfavorable currency translation contributed to lower crop protection sales in the company's agriculture unit in the third quarter and may continue to weigh on sales in the fourth.

Dow and DuPont DD agreed to combine their businesses in Dec 2015 in an all-stock deal to create a chemical powerhouse (dubbed "DowDuPont") with a combined market value of around $130 billion, before eventually breaking up into three independent companies through tax-free spin-offs. The combined company would split into pure-play agricultural, material science and specialty products businesses that will be leading players in their respective fields. The breakup is expected to take place 18 months after the completion of the deal.

The planned mega-merger is currently under investigation by the European Commission (EC) with a decision is expected by Feb 2017. The merger is projected to deliver cost synergies of around $3 billion, expected to be achieved with the first two years after the deal closure. Around $1 billion of additional growth synergies are also expected to be achieved from the merger. We expect Dow to provide an update on the deal in its fourth-quarter call.

Earnings Whispers

Our proven model shows that Dow is likely to beat earnings because it has the right combination of the two key ingredients.

Zacks ESP: The Earnings ESP for Dow is +4.55% as the Most Accurate Estimate stands at 92 cents while the Zacks Consensus Estimate is pegged at 88 cents. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Dow currently carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings.

Conversely, sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement.

The combination of Dow's Zacks Rank #3 and positive ESP makes us reasonably confident of an earnings beat.

Stocks That Warrant a Look

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

Methanex Corporation MEOH has an Earnings ESP of +53.33% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

Albemarle Corporation ALB has Earnings ESP of +2.67% and carries a Zacks Rank #2.

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E.I. du Pont de Nemours and Company (DD): Free Stock Analysis Report

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Albemarle Corporation (ALB): 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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