Dow Chemical: Earnings Preview

Jan.31.12 | About: Dow Chemical (DOW)

The Dow Chemical Company (NYSE:DOW) is scheduled to report its fourth quarter and full-year 2011 results before the market opens on Thursday, February 2.

The Zacks Consensus Estimate for the quarter is 32 cents per share, representing a year-over-year decrease of 32.24%.

With respect to earnings surprises, the company has beaten the Zacks Consensus Estimate in three of the trailing four quarters. This is reflected in the average earnings surprise of 14.95%, with positive surprises in three quarters and a negative surprise in the third quarter of 2011.

Third-Quarter Synopsis

The Dow Chemical Company earned 69 cents per share in the third quarter of 2011, ahead of the Zacks Consensus Estimate of 64 cents per share as well as last year’s 45 cents per share. However, including one-time charges, the company earned 62 cents per share compared with 54 cents per share in the year-ago quarter.

Quarterly revenues jumped 17% year over year to $15.1 billion, surpassing the Zacks Consensus Estimate of $14.7 billion. The improvement was driven by double-digit gains in all operating segments and geographic areas, with the largest growth in Latin America (21%) and Europe, Middle East and Africa (EMEA) (19%). In the emerging geographies, sales reached $5 billion, a new quarterly record for the company.

Company’s Outlook

There was no financial guidance from Dow. However, Dow anticipates demand to improve further, especially in Asia with the global economic recovery. The US and European markets have also started showing signs of improvement.

Dow is also optimistic on major consumer-markets, including electronics, coatings, automotive and packaging. However, construction markets are expected to remain weak.

Agreement of Estimate Revisions

In the past 30 days, two analysts made downward revisions for the fourth quarter and fiscal 2011. None of the analysts made upward revision in the last 30 days for the fourth quarter of 2011 and fiscal 2011. The analysts have lowered their estimates due to the increase in the prices of ethane due to strong demand and limited supply.

In the last seven days, none of the analysts made any revisions to their estimates.

Magnitude of Estimate Revisions

In the last 30 days, the Zacks Consensus Estimate has decreased to 32 cents from 33 cents in fourth quarter and has improved marginally to $2.64 from $2.63 per share for fiscal 2011.

Over the last 90-day period, the Zacks Consensus Estimate plunged from 42 cents to 32 cents per share for the fourth quarter of 2011 and from $2.73 cents to $2.64 per share for fiscal 2011.

Our Viewpoint

We expect the electronics and construction end markets to remain weak in the fourth quarter. Moreover, we believe that there will be a margin compression in Asia and Western Europe in the near term due to high costs and weak demand.

DOW also faces stiff competition from EI DuPont de Nemours & Co. (NYSE:DD).

However, Dow’s performance in the emerging markets remains strong and we expect this to continue in the upcoming quarter. Dow’s innovative line of products in its pipeline also adds to its strength. Further, the company continues to focus on cost reduction initiatives.

In view of the above stated reasons, the company retains a Zacks #2 Rank on its shares, indicating a short-term (1 to 3 months) Buy rating and we have a long-term (more than 6 months) Neutral recommendation on the stock.

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