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Dow Surpasses Zacks Estimates

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The Dow Chemical Company ([url=]DOW[/url]) reported EPS of 43 cents for the first quarter of fiscal 2010, up from 18 cents in the previous quarter and 11 cents in the year-ago quarter. Reported EPS surpassed the Zacks Consensus Estimate of 30 cents as well.

The increase in EPS was driven by the increase in volume and price across all geographical regions. Thus, revenue grew 7.6% sequentially and 48.4% year over year to reach $13,417 million in the first quarter. Net earnings were $552 million, up from just $24 million in the previous quarter and $178 million in the first quarter of fiscal 2009.

Revenue from Electronic and Specialty Materials segment grew 30.3% year over year and from Coatings and Infrastructure increased 15.6%. Revenue from Performance Systems and Performance Products bloated 29.5% and 29.4% respectively. At Basis Plastic and Basic Chemicals revenues moved up by 48.9% and 22.1% respectively. Revenue from Hydrocarbons and Energy segment grew 30.6%. However, revenue from Health and Agricultural Sciences and Corporate segment declined 6.3% and 78.8% respectively.

Geographically, revenue from North America grew 14.0% and from Europe, Middle East and Africa increased 23.9%. Revenue in Asia Pacific almost doubled from $1,567 million to $2,369 million, representing an increase of 51.2%. Latin American revenues grew 25.5% year over year.

Gross profit doubled to $1,876 million from $903 million during the corresponding period of fiscal 2009. Gross margin increased by 400 basis points due to increase in net revenues. R&D expense as a percentage of revenue slipped by 20 basis points while SG&A expense as a percentage of revenue remained flat at 4.9%.

Net debt increased to $17,685 million from $17,388 million at the end of previous quarter based on the acquisition of Rohm and Haas as well as the full repayment of the outstanding balance of the company’s revolving credit facility.

Dow Chemical continues to make progress in delivering cost synergies from the Rohm and Haas acquisition, which is expected to provide higher margin and consolidate higher growth specialty businesses while reducing volatility in earnings and cash flow. However, the economic slowdown in North America is a concern for Dow as it generates about 36% of its revenue from the region. Thus, we reiterate our Neutral recommendation.

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