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Chemical powerhouse The Dow Chemical Company
(DOW - Analyst Report
) will unfurl its third-quarter 2012 results before the opening gong on Thursday, October 25. Estimates for Dow are on the downswing ahead of its third quarter earnings release as analysts expects lingering issues from the first half to continue to be a drag on the Michigan-based company’s results.
Analysts polled by Zacks currently expect revenues of $14,130 million and earnings of 37 cents a share on average for the third quarter. The Zacks Consensus Estimate for earnings calls for an estimated year-over-year decline of 39.7%.
While Dow did not reveal any specific financial guidance, it sees lower-than-expected recovery in global economy in both the third and fourth quarters this year. The company said that it plans to beef up cost reduction and efficiency programs to cope with the exigent macroeconomic environment.
Why It Matters
Dow’s products have application in almost every industry. As such, its third quarter results will shed light on overall economic activity, end market scenario and demand trend for chemical products across a wide gamut of industries. Dow’s compatriot EI DuPont de Nemours & Co.
(DD - Analyst Report
) will report its third quarter results before the opening bell on October 23.
Companies in the chemicals space witnessed sluggish economic activity in the first half of the year given the fragile economic conditions in Europe, weak recovery in the U.S. and a marked slowdown in emerging markets. So, reports from these two chemical titans will provide color on how the industry is faring.
Second Quarter Revisited
Dow had a drab second quarter with both revenues and earnings largely missing the Zacks Consensus Estimate. The company earned 55 cents a share in the quarter, falling behind the Zacks Consensus Estimate of 64 cents. Profit slipped roughly 34% year over year, hammered by the beleaguered economic conditions in Europe and weak demand.
Revenues slipped 10% year over year to $14,513 million, also missing the Zacks Consensus Estimate of $15,961 million. Sales declined across all segments except Agricultural Sciences which achieved double-digit growth in the quarter.
Volumes dipped 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 fell 5% with declines registered across the globe.
Estimate Revisions Trends
Estimate for the third quarter demonstrate a comprehensive downward drift over the last 30 days with 5 analysts (out of 13) having reduced their forecasts with none raising the same.
Estimate for 2012 elicit a similar bearish sentiment over the past month with 5 analysts (out of 18) having chopped their forecasts with none moving in the opposite direction. No movement was witnessed for both the third quarter and full-year 2012 over the past week. The analysts appear to fret about the soft U.S. and European economies and choppy global demand, which may dent the company’s results in the third quarter.
Given the directional pressure from the downward revisions, estimate for the September quarter decreased by 2 cents over the past month. However, it remained static (at 37 cents a share) over the past week. The estimate for 2012 decreased by a penny over the past 30 days while remaining unchanged (at $1.95 a share) over the past 7 days.
With respect to earnings surprises, Dow’s performance has been tepid over the past four quarters. The company has missed the Zacks Consensus Estimate in three of the trailing four quarters while beating the same on one occasion. It has produced an average negative earnings surprise of 8.92% over the past four quarters.
What We Expect in 3Q
Dow is benefiting from strong fundamentals in agriculture and food markets. A string of innovative products in its pipeline also adds to its strength. The company’s performance in the fast-growing emerging economies remains strong and we expect this to continue in the September quarter.
Dow is also expected to benefit from declining feedstock costs in the third quarter. The company continues its cost-reduction initiatives under its “Efficiency for Growth” program, which are expected to yield meaningful cost savings annually.
However, the recessionary conditions in Europe have taken its toll on Dow. Moreover, a slow domestic recovery and sluggish activity in China and other emerging markets may continue to impact the demand for the company’s products and weigh on its third quarter results. Dow is also exposed to currency headwinds given the weak euro and is expected to see a contraction in ethylene margins in Europe in the quarter.
Moreover, Dow contends with soft electronics and construction end-markets, which may also impact its September quarter results. Building and construction sales are declining due to lower volume in Europe. We expect the company to provide some insight on the trends across these markets in its third quarter commentary.
Dow retains a Zacks #3 Rank, indicating a short-term Hold rating. We currently have a long-term Underperform recommendation on the stock.