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Chemical giant The Dow Chemical Company( ( DOW - Analyst Report ) ) announced plans to house its plastics business in a new division, “Performance Plastics unit”, which will serve customers in personal hygiene, food, telecommunications and other highly profitable sectors.
The new unit will be handled by Howard Ungerleider, Dow's former head of investor relations, and will also oversee sales to packaging and cable customers.
The decision came as part of Dow’s new strategy to focus on high margin materials, rather than its traditional expertise in low margin commodity plastics.
For almost three years, Dow has been trying to sell or spin-off its basic plastics business, which sells low-margin, high-volume commodity plastics. It also planned a joint venture with Kuwait in late 2008 to spin off its basics plastics business into a stand-alone company called KDow. However, the plan was eventually scrapped.
Also Dow AgroSciences, a subsidiary of Dow Chemical, announced the publication of an international patent application for its lead commercial herbicide tolerance event in corn, which is part of Dow AgroSciences' innovative new class of herbicide tolerant traits, and is planned to be commercialized during 2012-2013.
The previous day, Dow also announced an investment of $100 million in its internally pitched projects to reduce greenhouse gas (GHG) emissions and improve energy efficiency.
In February, Dow reported sales of $13.8 billion for the fourth quarter of 2010, which was up 22% year over year. The company’s net earnings were 37 cents per share in the fourth quarter of 2010, ahead of the Zacks Consensus Estimate of 35 cents as well as last year’s 8 cents. However, including one-time charges, the company earned 47 cents compared with 18 cents in the year-ago quarter.
Recently, Dow and ExxonMobil Chemical Company, a division of ExxonMobil Corp. ( XOM - Analyst Report ) , signed an agreement to divest their ownership interests in Dexco Polymers L.P. to TSRC Corporation (TSRC) of Taiwan in the second quarter of 2011. We believe through divestures and acquisitions, Dow will become an integrated, market-driven, technology-based enterprise that delivers stable earnings growth.
Dow continues to deliver cost synergies from the Rohm & Haas (ROH) acquisition, which is expected to consolidate the higher margin and higher growth specialty businesses while reducing volatility in earnings and cash flow. We believe that management’s strategy of selling equity interests in commodity assets is appropriate, though these units continue to produce good results as the global economy strengthens.
Dow’s net debt is $20.6 billion following completion of the Rohm and Haas transaction and subsequent divestitures, equity offerings and debt retirement. The company is focusing on its core business and has been divesting non-strategic assets. However, we are wary of the macro trends. Moreover, we believe a slower recovery in the developed markets of the US and Europe, excess supply conditions in key commodities and higher raw material costs could restrain growth.
We maintain our long term Neutral recommendation on Dow Chemical. Currently, it holds a short-term Zacks #1 Rank (Strong Buy) on the stock.
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