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Europe Hits Dow Chemical in 2Q

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The Dow Chemical Company (DOW - Analyst Report) saw its profit sag in second-quarter 2012 hammered by the soft economic conditions in Europe and weak demand. The Michigan-based chemical powerhouse, whose products are used across a broad spectrum of industries, earned 55 cents a share in the quarter.

That largely missed the Zacks Consensus Estimate of 64 cents and significantly trailed the year ago earnings of 84 cents (or 85 cents excluding items).

Dow logged a profit of $649 million in the quarter, a roughly 34% year-over-year skid. The company’s shares fell 3.4% in pre-market trading to reflect the miss.

The U.S. chemical kingpin witnessed slowing economic activity in the second quarter, largely due to the beleaguered economic conditions in Europe. Moreover, high unemployment coupled with waning consumer confidence hindered economic recovery in the U.S. Activity in China and other emerging markets also slowed in the quarter. All these factors led to a weak demand for its products. Unfavorable currency exchange impact added to the pain.

Dow’s peer EI DuPont de Nemours & Co. (DD - Analyst Report) delivered mixed second quarter results earlier this week beating on earnings while falling short on the revenue front. Weak conditions in Europe weighed on its results.
 
Revenue, Volume and Pricing

Revenues tumbled 10% year over year to $14,513 million, trailing behind the Zacks Consensus Estimate of $15,961 million. Sales fell across all segments except Agricultural Sciences which achieved double-digit growth in the quarter. Revenues in Europe slid 10%, largely due to currency headwinds.

Volumes declined 5% year over year (1% on an adjusted basis) in the quarter. However, the company saw gains across Agricultural Sciences and Performance Plastics divisions as wells as in Asia-Pacific. Price dipped 5% in the quarter with declines registered across the globe.

Segment Analysis

Electronic and Functional Materials


Revenues from this segment clipped 4% year over year to $1.2 billion as price and volume both declined in the quarter. Dow Electronic Materials recorded lower sales in the quarter given a weak electronics industry. However, the business saw volume gains in Semiconductor Technologies.

In Display Technologies, strong growth in LED materials was offset by lower sales in backlight film applications. Functional Materials business posted lower sales in the quarter.

Coatings and Infrastructure

Sales dipped 6% to $1.9 billion in the quarter as price fell 6% and volume remained flat year over year. The company’s Water and Process Solutions business reported record sales on the back of volume gains. However, sales fell in the Dow Coating Materials business as lower price more than offset healthy volume gains. Dow Building and Construction business posted lower sales as volume shrunk in Europe.

Agricultural Sciences

The segment registered record sales of $1.7 billion, a 12% year-over-year surge. Volumes climbed 10% while prices rose 2%. Crop Protection products revenues jumped 8% riding on solid growth across North America, Latin America, and Asia-Pacific.

Revenues from Seeds, Traits and Oils business zoomed over 30%, driven by new seed technologies. Corn business continues to see strong demand from farmers of SmartStax hybrids in North America and increased adoption of Herculex technology in Latin America.

Performance Materials

Revenues slid 11% to $3.4 billion on account of volume and price declines. Volumes declined across all geographies, especially in Latin America.

Polyurethanes saw improved demand in Asia Pacific, offset by lower pricing. Dow Automotive Systems reported higher pricing in most regions, partly offset by lower demand in Latin America and EMEA. Polyglycols, Surfactants and Fluids business recorded price improvements North America, Asia Pacific and Latin America. 

Revenues from Epoxy fell in the quarter. Dow Oil and Gas delivered double-digit growth. Oxygenated Solvents revenues were dragged down by supplier production issues in Asia-Pacific and soft demand in coating and electronic markets.
 
Performance Plastics

Sales fell 6% to $3.7 billion in the quarter as price decline more than offset volume gains. Dow Elastomers delivered record results and registered double-digit growth in North America, Asia-Pacific and Latin America.

Electrical and Telecommunications business posted higher sales with double-digit volume gain in Asia-Pacific. Revenues fell in Performance Packaging, in part, due to price decline across the board.

Feedstocks and Energy

The division witnessed a 10% year-over-year decline in sales due to lower volume and price. The Chlor-Alkali/Chlor-Vinyl business posted lower sales, hurt by weak demand for vinyl chloride monomer. Ethylene Oxide sales increased in the quarter on better pricing, but Ethylene Glycol revenues fell due to soft demand. Strong demand for Caustic soda was witnessed in the quarter.

Financial Condition

Dow exited the quarter with cash and cash equivalents of $4.1 billion, up 86% year over year. Total long-term debt increased 5% year over year to roughly $20.2 billion. Net debt-to-capitalization ratio reduced to 40.4% from 41.6% a year ago.

Outlook and Recommendation

Looking ahead, Dow sees lower-than-expected recovery in global economy in second-half 2012. The company plans to beef up cost reduction and efficiency programs to deal with the challenging macroeconomic environment.

Dow is benefiting from strong fundamentals in agriculture and food markets. However, weakness in the electronics and construction end-markets may linger moving ahead. 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, which is in sync with a short-term Zacks #3 Rank (Hold).

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