Earnings Preview: Dow Chemical

Chemical titan The Dow Chemical Company (DOW - Analyst Report) is scheduled to report its second-quarter 2012 results before trading begins on Thursday, July 26. Analysts polled by Zacks currently expect revenues of $15,961 million and earnings of 64 cents a share on average for the quarter. The Zacks Consensus Estimate for earnings represents an estimated year-over-year decline of 24.6%.

While Dow did not reveal any specific financial guidance, it believes economic recovery will gain momentum in the June quarter and the remainder of the year. The Michigan-based company expects to meet its short- and long-term targets irrespective of economic conditions. Moreover, Dow sees an improving U.S. economy citing tailwind from the nation’s rich access to low-cost natural gas.

With respect to earnings surprises, the company has beaten the Zacks Consensus Estimate in two of the trailing four quarters while missing on two other occasions. Dow has delivered an average negative earnings surprise of 3.84% over the past four quarters.

First Quarter Flashback

Dow started the year with mixed results in the first quarter, beating the Zacks Consensus Estimate on earnings while falling behind on the revenue front. The company recorded adjusted (excluding one-time charges) earnings of 61 cents a share in the quarter, which beat the Zacks Consensus Estimate by two cents while falling below the year-ago adjusted earnings of 82 cents.

Profit (as reported) slipped 34% year over year to $412 million (or 35 cents a share), bogged down by restructuring charges of roughly $357 million associated with plant closures and downsizing.

Revenues dipped narrowly year over year to $14,719 million, missing the Zacks Consensus Estimate of $15,342 billion. Healthy growth across agricultural and feedstock/energy businesses were neutralized by declines in performance materials and performance plastics franchises.

Volumes declined 1% year over year, but were up 3% barring the impact of divestitures. On an adjusted basis, the company saw gains across Europe, the Middle East and Africa (EMEA) and North America and declines in Latin America and Asia Pacific.

Estimate Revisions Trends

Agreement

Estimates for the second quarter demonstrate lack of activity over the past week with no movement in either direction. However, there has been a downswing over the last 30 days with 6 analysts (out of 12) having trimmed their forecasts with just 1 raising the same.

Estimate for 2012 elicit a comprehensive downward drift over the past month with 8 analysts (out of 17) having slashed their forecasts with none moving in the opposite direction. No activity was witnessed over the past week.

Magnitude

Estimate for the June quarter decreased by three cents over the past month while remaining static over the past week. Given the directional pressure from a slew of negative revisions, the estimate for 2012 decreased by 5 cents over the past 30 days. However, estimate for the year remained stationary (at $2.48 a share) over the past 7 days.

Our View

Dow is benefiting from strong fundamentals in agriculture and food markets. The company’s performance in the emerging markets remains strong and we expect this to continue in the June quarter.

A string of innovative products in its pipeline also adds to its strength. Among notable new offerings, Dow recently introduced POWERHOUSE, the nation’s first solar shingle roof product, across select markets. The company projects new product sales to reach $800 million by 2013.

Dow expects its downstream, market-driven businesses to continue to capture value from improving North American feedstock dynamics. It anticipates the favorable trend in the ethylene industry to continue. The company’s strategic initiatives (including technology licensing deals) are expected to boost ethylene production capabilities, thereby offering significant opportunity for margin expansion.

Moreover, Dow continues to focus on cost containment initiatives. As part of the move, the company is closing its manufacturing facilities in Europe, North America and Latin America and reducing headcount. Dow anticipates savings of roughly $250 million annually from these actions.

However, Dow is witnessing softness in the electronics and construction end-markets, which may weigh on its second quarter results. The construction market in Europe remains soft. Moreover, the company will continue facing challenges in Western Europe due to weak demand and the sovereign debt crisis.

We currently have a long-term Neutral recommendation on Dow Chemical. The company, which competes with EI DuPont de Nemours & Co. (DD - Analyst Report), retains a Zacks #3 Rank, indicating a short-term Hold rating.