Dow Chemical Gears Up for Q4: Will It Beat Earnings Again? - Analyst Blog

Dow Chemical (DOW) is set to release its fourth-quarter 2014 results ahead of the bell on Jan 29. Last quarter, the U.S. chemical kingpin delivered a 7.46% positive surprise on strength across its performance plastics and electronic and functional materials businesses. The company also gained from productivity actions and higher pricing.
 
As Dow’s products are used in almost every industry, its fourth-quarter results will provide color on end market scenario and demand trends for chemical products across a spate of industries.
 
Dow has beaten the Zacks Consensus Estimate in the trailing 4 quarters with an average beat of 18.57%. The Zacks Consensus Estimate for Dow for the fourth quarter has remained unchanged at 68 cents per share over the last 7 and 30 days.
 
Is the company poised for another wining quarter? Let’s see how things are shaping up for this announcement.
 
Factors to Watch For
 
Healthy momentum is expected to continue in Dow’s performance plastics businesses in the December quarter amid headwinds stemming from reduced oil prices. Moreover, the company’s strategic actions are expected to lead to improved results in its performance materials business.

Dow, however, expects downward seasonality across its electronic and functional materials and coatings and infrastructure franchises in the fourth quarter. For the company’s agricultural sciences unit, higher spending associated with turnaround activities may put some pressure on margins in the quarter.

Dow is also expected to continue to gain from its productivity and growth actions as well as its aggressive cost-reduction initiatives. The company is also selectively divesting underperforming assets that are exposed to raw material price swings.
 
Dow is exiting a major portion of its chlorine business that has been in operation for over 100 years. The company has already completed $1.3 billion of divestments and expects to achieve proceeds from non-core asset sales at the top end of its earlier announced range of $4.5 billion-$6 billion by end-2015. Dow is expected to provide some insights on its portfolio optimization program in the fourth quarter call.
 
We also expect Dow to provide an update on its U.S. Gulf coast and Middle East investments that are focused on boosting North American feedstock advantage and are expected to help it achieve its overall EBITDA target of over $10 billion. Dow is investing billions of dollars for setting up crackers (produces ethylene from ethane) leveraging the abundant natural gas supply and cost advantage.
 
Earnings Whispers

Our proven model does not conclusively show that Dow will beat earnings estimates this quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Ranks #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: ESP for Dow is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 68 cents.
 
Zacks Rank #5 (Strong Sell): Dow’s Zacks Rank #5 when combined with an ESP of 0.00% makes surprise prediction difficult. We caution against stocks with Zacks #4 and #5 Ranks (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
 
Stocks That Warrant a Look
 
Here are some other companies in the chemicals space you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Trecora Resources (TREC) has an earnings ESP of +5.00% and holds a Zacks Rank #2 (Buy).

Compass Minerals International Inc. (CMP) has an earnings ESP of +2.60% and carries a Zacks Rank #1 (Strong Buy).

Airgas, Inc. (ARG) has an earnings ESP of +0.81% and carries a Zacks Rank #3 (Hold).

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DOW CHEMICAL (DOW): Free Stock Analysis Report
 
AIRGAS INC (ARG): Free Stock Analysis Report
 
COMPASS MINERLS (CMP): Free Stock Analysis Report
 
TRECORA RESRCS (TREC): Free Stock Analysis Report
 
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