Keeping a Balanced View on Dow

We have retained our Neutral recommendation on Dow Chemical (DOW - Analyst Report) following its mixed fourth-quarter 2012 results. Its adjusted earnings for the quarter missed the Zacks Consensus Estimate while revenues beat.

Why Kept at Neutral?

The U.S. chemical giant turned to a wider loss (on a reported basis) in the fourth quarter on hefty restructuring and goodwill impairment charges. Lower pricing and weak market conditions impacted sales in the quarter. However, Dow’s agricultural business was a bright spot with sales increasing at a double-digit clip.

Dow is benefiting from strong fundamentals in agriculture and food markets and is leveraging its North American feedstock advantage. A string of innovative products in its pipeline adds to its strength.

The company remains focused on driving earnings leveraging its feedstock strength and strong momentum in the agricultural sciences business. It also continues to pursue its cost reduction and efficiency programs. Dow targets aggregate cost savings of $2.5 billion with $1 billion expected this year.

Moreover, Dow remains committed to offer incremental returns to its shareholders. It also continues debt repayments while making further investments.

However, Dow continues to witness slowing economic activity, largely due to the beleaguered economic conditions in Europe. Softness across end markets, especially in China, and weak pricing are affecting its results. Weakness in the electronics and construction end-markets may continue in first-quarter 2013.

Moreover, Dow is exposed to significant pension headwinds. The company expects pension costs to increase between $250 million and $300 million in 2013.

Dow currently retains a short-term Zacks Rank #3 (Hold)

Other Stocks to Consider

Other companies in the chemical industry worth considering are Arkema S.A. (ARKAY), BASF SE (BASFY) and Air Products (APD - Analyst Report). While Arkema retains a Zacks Rank #1 (Strong Buy), both BASF and Air Products hold a Zacks Rank #2 (Buy).