Wednesday, October 24, 2007

Dow Chemical Earnings Preveiw

Dow Chemical (DOW), whose share are up 9% to date this year and pay a near 4% dividend reports earnings tomorrow. What are we looking for?

-Health of Joint Venture (JV) Strategy:
We are going to be looking at the "equity earnings" to see how well the joint ventures are performing vs last year and what percentage of earnings they represent. To see the current JV's and understand how to read the earnings of them, please visit here: This will become more important every quarter and in after 2008 this section should take real prominence as the slew of JV's announced this year begin coming online. Last quarter this segment produced 11% earnings growth and are up 30% year to date.

- Share Repurchases / Dividends / Debt:
Earlier in the summer Dow increased the dividend so do not expect any news on this front (although it would be nice). What is most likely the best use currently would be an acceleration of the share repurchases and decreasing the debt which has fallen $3.5 billion or 30% the past 3 years.

DuPont (DD) reported increased earnings yesterday and that has put the pressure on Dow. Much of DuPont's increase was due to their strong agribusiness division. Dow, which is expending very aggressively into this area, is not big enough here to allow this divisions expected increase to affect earnings to the same degree as DuPont. That being said the overall analyst estimates are for $.90 cents a share. I would expect Dow to beat that and come in at $.95 to $.96 cents a share.

My feeling s the JV strategy and its contributions is not yet being fully incorporated into estimates. This strategy is a self funding one and its success is allowing Dow to produce about $1 billion a quarter from operations. This has enabled Dow to make the above mention decreases in debt at the same time raising its cash balance to near $4 billion. The debt reduction alone has decreased annual expenses $100 million a year or has added $.10 a share to earnings.

Input costs have skyrockets in this sector in the last year and Dow is in the process of moving operation to areas that raw material are exponentially cheaper. What is important to look for is how these cost are being managed in the short term because in the long term ,we know they will fall dramatically.

Every since Dow canceled it appearance at a meeting last week, rumor have been running rampant. Lehman Brothers (LEH) analyst Sergey Vasnetsov said the announcement might indicate that Dow Chemical is planning a "significant transformation" in the near-term. Vasnetsov noted major moves by companies elsewhere in the sector. PPG Industries Inc. (PPG) purchased SigmaKalon Group, a Dutch paint and coatings producer, and Rohm & Haas Co. (ROH) said it will buy back $2 billion in stock.

"Dow is likely to undergo a significant transformation in the near-term, perhaps using the recent PPG and Rohm & Haas actions as a roadmap," Vasnetsov wrote in a client note.

Honestly, do not expect much in the way of earth shattering news. It is not Liveris's style.

Just results..

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