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We expect chemical powerhouse Dow Chemical (DOW - Analyst Report) to beat earnings expectations when it reports third-quarter 2013 results before the opening gong on Oct 24.

Why a Likely Positive Surprise?

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

Positive Zacks ESP: The Earnings ESP for Dow is +1.85% - the difference between the Most Accurate estimate of 55 cents and the Zacks Consensus Estimate of 54 cents. This indicates a likely positive earnings surprise.

Zacks Rank #3 (Hold): Dow’s Zacks Rank of 3 increases the predictive power of its ESP. The combination of its Zacks Rank and Earnings ESP makes us confident of a positive earnings surprise in the third quarter.

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

Expected Earnings Drivers

Dow has beaten the Zacks Consensus Estimate in three of the trailing four quarters with an average beat of 6.79%. It is benefiting from strong fundamentals in agriculture and food markets which should boost to its earnings in the third quarter as did in the second. Strength in its agriculture business is driven by higher demand for crop protection products.

A string of innovative products also adds to Dow’s strength. While Europe remains a weak spot, the company’s performance in the fast-growing emerging economies is expected to be healthy in the September quarter.

Dow is also expected to benefit from significant feedstock advantage in North America in the third quarter. The company’s investments in the U.S. Gulf Coast and Middle East are focused on boosting this advantage. Moreover, Dow’s cost-reduction initiatives under its “Efficiency for Growth” program and restructuring measures should yield meaningful cost savings and support margin expansion.

Other Stocks to Consider

Dow is not the only firm looking up this earnings season. We also see likely earnings beats coming from these chemical companies.

FMC Corp. (FMC - Analyst Report) has an earnings ESP of +2.41% and carries a Zacks Rank #2 (Buy).
 
Huntsman Corporation (HUN - Snapshot Report) has an earnings ESP of +1.85% and holds a Zacks Rank #2 (Buy).

Methanex Corporation (MEOH - Analyst Report) has an earnings ESP of +3.03% and retains a Zacks Rank #2 (Buy).

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