Dow Chemical (DOW Quick QuoteDOW - Free Report) is scheduled to report its first-quarter 2017 results ahead of the bell on Apr 27.

Last quarter, the U.S. chemical kingpin delivered a 12.50% positive earnings surprise, helped by its cost-cutting and productivity actions and continued focus on consumer-driven markets. Sales rose by double-digits year over year as volumes rose on the back of the acquisition of Dow Corning’s silicones business. Revenues topped expectations.

Dow has beaten the Zacks Consensus Estimate in all of the trailing four quarters with an average beat of 11.31%. 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 is witnessing signs of positive economic momentum with the U.S. currently in expansionary mode while Europe continues its gradual recovery notwithstanding growing political uncertainty and geopolitical tensions. Moreover, sustained growth of middle class continues to drive demand in Asia. The company also envisions improvement in Latin America with slow but stable gains in Brazil.

The company expects demand to remain healthy, especially in the businesses that cater to packaging, infrastructure, consumer care, electronics, automotive and agriculture.

Dow has outperformed the Zacks categorized Chemicals-Diversified industry over a year. The company’s shares have gained around 17% over this period, compared with roughly 11.5% gain recorded by the industry.

Dow should continue to gain from its productivity improvement and cost control actions in the March quarter. The company remains on track to deliver $1 billion of cost reduction under its three-year productivity program. Dow achieved $313 million in productivity savings in 2016, thereby surpassing its cost savings goal for the year. The company’s continued focus on productivity improvement should lend support to its earnings in 2017.

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. Dow has already reached a cost synergy run-rate of more than $360 million. The company also expects to realize $1 billion in annual EBITDA synergies. Dow is taking a number of actions 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 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 also recently completed the construction of the new ethylene cracker that is on track to be operational by mid-2017.

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

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 is also seeing weakness in the energy market, stemming from the low oil price environment that is hurting oil and gas exploration project demand. The company saw lower volumes in its energy business in the fourth quarter due to weak demand from refining and processing end markets.

Dow is also witnessing competition-driven pricing pressure in its performance materials & chemicals unit. The company also faces feedstock cost pressure in its performance plastics business (evident from a roughly $100 million increase in feedstock and energy costs in fourth quarter). The company expects raw material cost pressure to continue in the first quarter.

Dow and DuPont 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 breakup is expected to take place 18 months after the completion of the deal.

The companies, in Mar 2017, said that the European Commission (EC) has conditionally approved their proposed merger. The approval, which came after both companies committed to sell major portions of different businesses, is a major step toward closing the merger transaction. The approval is conditional on the companies fulfilling the commitments given to the EC in connection with the clearance.

DuPont, last month, struck a deal to sell part of its Crop Protection business to chemical company, FMC Corp. Moreover, DuPont agreed to buy substantially all of FMC's Health & Nutrition business. The deal with FMC is subject to the completion of the Dow-DuPont merger and other customary closing conditions.

Dow and DuPont also amended their merger deal to accommodate the requirements of the FMC transaction. The companies now expect completion of their merger to take place between Aug 1, 2017 and Sept 1, 2017. The closing is subject to satisfaction of customary closing conditions including receipt of regulatory approvals. Earlier, the transaction was expected to complete in first-half 2017. We expect Dow to provide an update on the deal in its first-quarter call.

Earnings Whispers

Our proven model does not conclusively show that Dow is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: The Earnings ESP for Dow is -4.04% as the Most Accurate Estimate stands at 95 cents while the Zacks Consensus Estimate is pegged at 99 cents. 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, which when combined with a negative ESP, makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

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:

The Chemours Company (CC Quick QuoteCC - Free Report) has an Earnings ESP of +4.08% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Methanex Corporation (MEOH Quick QuoteMEOH - Free Report) has an Earnings ESP of +13.04% and carries a Zacks Rank #1.

Albemarle Corporation (ALB Quick QuoteALB - Free Report) has an Earnings ESP of +2.11% and carries a Zacks Rank #2.

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