Seeking Alpha
Profile| Send Message|
( followers)  

Dow Chemical (NYSE:DOW) recently released its quarterly results that showed the increasing importance of its agricultural science business on the firm's revenues. It is now gearing up to compete with the bigger players in the agricultural segment as it drives towards developing genetically modified seeds while it continues to scale back some of its less lucrative and non-core operations.

Earnings

Dow reported earnings of $0.46 per share in Q1 2013 rising from $0.35 per share year over year. Its revenues fell 2.3% to $14.38 billion from $14.71 billion but net income rose 33.5% from $412 million to $550 million. On the other hand, its rival Du Pont (NYSE:DD) reported net sales of $10.50 billion, which rose 3% from $10.19 billion but its net income climbed 124% to $3.35 billion from $1.50 billion in 2012 but this includes the $2 billion in net income from discontinued operations. Overall, its income from continuing operations has dropped by 1.56% to $1.39 billion. The main support to earnings for both of these companies came from their agriculture units as the sales of corn-seeds and pesticides rose.

Meanwhile, the world's largest seed company, Monsanto (NYSE:MON) also reported its earnings recently for its quarter ended on Feb 28, 2013. Its sales rose 15% to $5.5 billion, while earnings increased by 22% to $1.48 billion or $2.74 per share from $1.21 billion or $2.24 per share in the same quarter of 2012. Although the results are good but there is little to boast about as earnings primarily received a boost from its glyphosate herbicide unit, whose sales rose 37%, and a lower tax rate while corn seed and genetic traits reported growth of 16% to $3.28 billion.

The Growth of Agriculture

Both Dow and Du Pont have traditionally supplied the manufacturing industry with chemical materials and this has driven previous growth, but now it is agriculture, which is sitting in the driving seat.

In Q1 2013, Dow's Agriculture Sciences division grew 14.4% to $2.1 billion depicting record sales. On the other hand, Performance Materials fell by 4.2% and Performance Plastics fell by 2.6%. The business still gets 48% of its net revenues from Performance Materials and Plastics together. The units have been struggling due to soft demand in Europe, which has caused the closure of its polyethylene plant in Belgium. These segments have reported volume declines of 3% - 5%. Beside Agriculture Sciences, Electronic and Functional Materials also reported positive growth.

DOW Chemical Co. segments sales

SEGMENTS

2012 (in Million)

2013 (in Million)

Change

Agriculture Sciences

$1,838

$2,103

14.40%

Performance Materials

$3,473

$3,328

-4.20%

Performance Plastics

$3,591

$3,498

-2.60%

Feedstocks and Energy

$2,935

$2,556

-12.90%

Electronic and Functional Materials

$1,121

$1,141

1.80%

Coatings and Infrastructure Solutions

$1,703

$1,667

-2.10%

The contrasting results of Du Pont's agriculture and chemicals units highlight the trends facing this industry. Du Pont, like Dow, also reported 14.4% growth in agricultural sales to $4.67 billion up YoY from $4.08 billion, but for Du Pont, this unit is the largest contributor of around 40% to net sales. Corn sales have remained strong in North America and Brazil. Besides this unit, only its Nutrition and Health segment reported rising sales -- 7.4%. The biggest revenue drop was reported in the Performance Chemicals segment whose sales plummeted 16.6% to $1.58 billion from $1.90 billion due to a significant decline in prices of titanium dioxide.

Du Pont Chemical Co. Segments sales

SEGMENTS

2012 (in Million)

2013 (in Million)

Change

Agriculture

$4,080

$4,669

14.40%

Performance Chemicals

$1,900

$1,585

-16.60%

Performance Materials

$1,600

$1,559

-2.60%

Safety and Protection

$941

$907

-3.60%

Industrial Biosciences

$289

$288

-0.30%

Nutrition and Health

$808

$868

7.40%

Electronics and Communications

$677

$616

-9.00%

The increasing cost of naphtha has affected the Dow's European plastic operations badly. The company now intends to build factories on the U.S. Gulf Coast to make use of shale gas to produce high margin specialty plastics as it is much cheaper to produce ethylene from natural gas.

The northern hemisphere is gearing up for the spring planting season and the last year's drought has increased the demand for seeds as well as pesticides. This is bullish for Monsanto, which is focusing on its drought-hardy seeds. As Dow dives deeper into agriculture, we will witness increasing competition with Monsanto, which has dominated this sector for years. In the coming years, Dow is going to pump the market with Enlist, its weed-resistant corn, which is going to compete directly with Monsanto's Roundup brand. However, the USDA remains cautious on giving the green light to the genetically modified seeds that can withstand 2,4-D and dicamba herbicides while critics and environmentalists have protested on the increasing use of 2,4-D and dicamba, which are significantly more harmful to the environment than glyphosate.

As always never discount the effects of politics on these decisions. Trading at a multiple of 42 tells me that the market is banking on Dow getting Enlist approved.

It looks now that at least in the short term, the two chemical giants will rely on their agricultural science operations to drive future growth. This would be a significantly bigger shift for Dow, which earns about half as much from Agriculture than Du Pont. Dow's stock has risen by 17% in the last six months and has been behind Du Pont but the latter is almost four times cheaper. Dow gives a slightly higher yield while Du Pont generates much higher return on equity.

Metric

DOW

Du Pont

P/E

42.4

11.3

EPS

0.81

4.93

Yield

3.7%

3.3%

Beta

1.89

1.48

ROA

3.8%

5.4%

ROE

5.4%

21.7%

Dow recently received $2.19 billion from Kuwait's state-run Petrochemical Industries who was penalized for walking away from the scrapped $17.4 billion plastics joint venture "K-Dow" in 2008. Dow will use inflow to reduce debt levels (Debt to Equity ratio of 91%) while some of the money will be given to shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Dow Chemical Continues To Shift Strategically Towards Agriculture