U.S. chemical kingpin The Dow Chemical Company (DOW) posted mixed third-quarter 2012 results and its profit slid on lower pricing across all regions. The company saw weak demand for its products in the quarter, largely stemming from the recessionary conditions in Europe.
Third Quarter Revisited
The Michigan-based company earned 42 cents a share in the third quarter, down from 69 cents (or 62 cents excluding items) posted a year ago. That, however, trumped the Zacks Consensus Estimate of 37 cents. Dow’s profit slid 39% year over year to $497 million as lower pricing dented its sales in the quarter.
Revenues dipped 9.7% (or 7% on an adjusted basis) year over year to $13,637 million, missing the Zacks Consensus Estimate of $14,130 million. Sales fell across all segments except Agricultural Sciences, which was the only bright spot in the quarter. Revenues in Europe slipped 10%, largely due to unfavorable currency translation.
Volumes nudged down 1% year over year (up 2% on an adjusted basis) in the quarter. On an adjusted basis, the company saw volume gains across all geographic regions. Price fell 9% in the quarter with declines witnessed across the globe, especially in Europe and China.
We have discussed the quarterly results at length here: Dow's 3Q Mixed, Snipping Jobs.
Agreement – Estimate Revisions
Estimates for Dow have been inclined towards the negative side following the company’s third quarter results. Out of 13 analysts covering the stock, 9 have slashed their estimates for the fourth quarter over the past 30 days with 2 moving in the opposite direction. No movement was witnessed over the past week.
For 2012, 8 (out of 18) analysts have trimmed their estimates over the past 30 days while 6 have raised the same. Similar to the fourth quarter, there were no revisions in either direction over the last 7 days.
The bearishness appears to reflect the concerns about the U.S. and European economies, slowdown in Asia and the weak pricing environment, which may continue to be a drag on the company’s results.
Magnitude – Consensus Estimate Trend
Given the directional pressure from a string of downward revisions, estimate for the fourth quarter has gone down by 4 cents over the past month while remaining stationary (at 33 cents a share) over the past week. For 2012, there has been a decrease of a penny and 6 cents in the estimate over the past 7 and 30 days, respectively. The current Zacks Consensus Estimate for 2012 is $1.89 per share, representing an estimated decline of roughly 25%
Dow, in its third quarter call, noted that it will focus on maximizing shareholder value and invest in areas which can deliver incremental margins. The company will continue to pursue its cost reduction and efficiency programs to cope with the sluggish macroeconomic environment.
The company, under a newly announced restructuring program, is trimming its global headcount by 5% and shuttering 20 of its manufacturing plants. It further plans to cut capital spending and investment on certain growth programs that have low priority. When combined with the $1.5 billion existing cost-cutting measures, the company’s new actions are expected to collectively deliver cost savings of $2.5 billion.
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 expanding technology pipeline is expected to fetch a $2 billion opportunity by 2015.
Dow is targeting faster-growing geographies. The company earns two-thirds of its income from outside the U.S. Growth in emerging economies has been especially fast, contributing a meaningful portion of its sales.
Moreover, the company continues to focus on offering incremental returns to its shareholders. It also continues debt repayments while making further investments. Moreover, Dow is aggressively pursuing its cost-reduction initiatives under the “Efficiency for Growth” program initiated in 2011.
However, Dow continues to witness slowing economic activity, largely due to the beleaguered economic conditions in Europe. Moreover, high unemployment is hindering economic recovery in the U.S. and activity in China and other emerging markets remain sluggish. All these factors are contributing to a weak demand for the company’s products, something which may continue into the fourth quarter.
Moreover, weakness in the electronics and construction end-markets may continue in the fourth quarter. Building and construction sales remain under pressure due to lower volume in Europe and recovery in electronics remains slow, partly due to sluggish growth China. Moreover, currency headwinds are expected to continue given the weak euro.
Dow, which competes with EI DuPont de Nemours & Co. (DD), currently holds a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.
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