The Dow Chemical Company: Earnings Preview

| About: Dow Chemical (DOW)

Chemical giant The Dow Chemical Company (NYSE:DOW) is scheduled to report its first-quarter 2012 results before the trading begins on Thursday, April 26. Analysts polled by Zacks currently expect revenues of $15,342 million and earnings of 59 cents a share on average for the quarter.

While Dow did not provide any financial guidance for the March quarter, it does not envision any significant improvement in market conditions in the quarter. However, it has projected that economic recovery will gain momentum in the second quarter and the remainder of the year. The company expects to meet its short- and long-term targets irrespective of economic conditions.

With respect to earnings surprises, the Michigan-based company has beaten the Zacks Consensus Estimate in two of the trailing four quarters. Dow has delivered an average positive earnings surprise of 0.91% over the past four quarters.

Fourth Quarter Highlights

Dow's fourth-quarter 2011 adjusted earnings of 25 cents a share missed the Zacks Consensus Estimate by 7 cents. Including one-time charges, the company sank to a loss of $20 million (or 2 cents per share) compared with a profit of $426 million (or 37 cents a share) in the year-ago quarter. That reversed a streak of consecutive profit increases as witnessed in the first three quarters of 2011.

Revenues inched up 2% year over year to $14.1 billion, but were below the Zacks Consensus Estimate of $14.4 billion. The company saw higher sales across all operating segments and geographic areas, except Electronic and Functional Materials. Volumes dipped 3% year over year, but were flat excluding the impact of divestitures.

The fourth quarter witnessed a challenging operating environment, mostly due to the sovereign debt issues in Western Europe. Moreover, traditional seasonality led to substantial de-stocking across supply chains, as customers snipped inventories prior to year end.

Estimate Revisions Trend


Estimates for the first quarter demonstrate a relative lack of movement over the past week with just 1 (out of 13 analysts) having lowered his/her forecast with none moving in the opposite direction. Over the past 30 days, 3 analysts made positive revisions while 2 lowered their estimates.

For fiscal 2012, there was a solitary (out of 16 analysts) downward revision over the past 7 days. However, estimates for the year were inclined towards the positive over the past 30 days with 3 analysts raising their forecasts and 1 lowering.


Given the lack of activity, the consensus estimate for the March quarter remained stationary over the past week. However, there was an increase of a penny over the past month. For fiscal 2012, the consensus estimate has increased by a couple of cents over the past 30 days while declining by a penny over the past 7 days.

Our View

Dow's performance in the emerging markets remains strong and we expect this to continue in the March quarter. A surfeit of innovative products in its pipeline also adds to its strength. Further, Dow continues to focus on cost reduction initiatives, generate enough cash flows and maximize returns to shareholders.

The company expects its downstream, market-driven businesses to continue to capture value from improving North American feedstock dynamics. Dow anticipates ethylene industry operating rates to tighten over the next several years, driving margin expansion.

However, we expect the electronics and construction end markets to remain weak in the first quarter. Moreover, the company will continue facing challenges in Western Europe due to weak demand and the debt crisis.

Dow recently announced that it will be cutting costs owing to weak demand of its products in Europe. As a part of the move, the company has announced the closure of its manufacturing plants in Europe, North America and Latin America.

Separately, Dow expects to lay off 900 workers as part of its previously announced cost-reduction efforts and its "Efficiency for Growth" program initiated in 2011. The company anticipates saving roughly $250 million annually from these actions. Dow expects to incur restructuring charges and write-downs of around $350 million in the first quarter of 2012.

We currently have a long-term Neutral recommendation on Dow Chemical. The company, which competes with EI DuPont de Nemours & Co. (NYSE:DD), retains a Zacks #3 Rank, indicating a short-term Hold rating.