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Dow (DOW) Gears Up for Q2 Earnings: What's in the Cards?

Zacks Equity Research

Dow Inc. DOW is scheduled to come up with its second-quarter 2019 results before the opening bell on Jul 25. The company is expected to face challenges from higher expected planned turnaround costs, margin pressure and currency headwinds. However, it will likely gain from higher expected demand and cost synergy savings in the quarter.

Dow’s shares are down around 11% over the past three months, compared with the roughly 14.3% decline recorded by the industry.

Let’s see how things are shaping up for this announcement.

What do the Estimates Say?

Dow expects revenues for the second quarter to be in the band of $11-$11.5 billion.

The Zacks Consensus Estimate for revenues for the second quarter for Dow is currently pegged at $11.3 billion.
Some Factors at Play

Dow, in its first-quarter 2019 call, said that it expects improvement in its core value chains on a sequential comparison basis on the back of seasonally higher demand, strength in consumer care, packaging and infrastructure sectors and normalization of inventory levels. These factors are expected to support margins.  

The company is also seeing sequentially higher pricing in its key intermediates, which is also expected to support earnings. It is also expected to benefit from cost synergy realizations in the to-be-reported quarter. The company expects to realize more than $125 million of year over year cost synergy savings in the quarter. It is on track to achieve roughly $600 million of savings this year.

However, Dow noted that it expects some challenges in the second quarter. These include headwind from sequentially higher spending related to planned turnaround and maintenance activities. The company expects roughly $200 million associated sequential headwind in the second quarter.

For the Performance Materials & Coatings unit, shipping restrictions from a performance monomers facility in the Deer Park, TX, is expected to continue in the second quarter due to limitations caused by a fire at a nearby third-party storage and terminal facility. The company expects around $40 million sequential and $50 million year over year headwind for the June quarter. Lower prices for siloxanes are also expected to continue to hurt margins. The segment, however, is expected to gain from seasonally higher coatings demand and continued demand strength in silicones.

Lower isocyanates pricing and margin pressure in isocyanates products are also expected to continue in the Industrial Intermediates & Infrastructure segment.  

Meanwhile, the company expects its Packaging & Specialty Plastics segment to continue to benefit from sustained strong demand, especially in functional polymers in the June quarter. However, the division is expected to face headwind from lower polyethylene pricing and margins.

Dow is also expected face headwinds from currency pressures in the June quarter. The company expects year over year currency headwinds of $20 million each for Performance Materials & Coatings and Industrial Intermediates & Infrastructure units for the second quarter. Moreover, currency is projected to be a roughly $50 million headwind for the Packaging & Specialty Plastics segment.

What the Zacks Model Says

Our proven model does not show that Dow is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. This is not the case here as you will see below:
Earnings ESP: Earnings ESP for Dow is -4.47%. This is because the Most Accurate Estimate is currently pegged at 82 cents while the Zacks Consensus Estimate stands at 86 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Dow carries a Zacks Rank #3, which when combined with a negative ESP, makes surprise prediction difficult.  

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies in the basic materials space you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Arconic Inc. ARNC has an Earnings ESP of +0.83% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Barrick Gold Corporation GOLD has an Earnings ESP of +2.56% and carries a Zacks Rank #3.

AK Steel Holding Corporation AKS  has an Earnings ESP of +71.43% and carries a Zacks Rank #3.

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