Thursday, October 25, 2007

Dow Chemical's "Sound", Not Great Quarter

Hard to come up with anything really positive on this one other than "at least it wasn't worse".

Dow Chemical (DOW), unlike DuPont (DD) earlier this week posted earnings that impressed no one. It was not a disaster but shareholders are not dancing either this morning. After DuPont reported increased earnings and raised full year guidance, expectations for Dow were elevated. DuPont got significant contributions from its agricultural division and Dow's did see dramatic improvement of EBIT of $65 million ($15 million after acquisition charges) up from $0 last year but like I said yesterday, this segment is not yet large enough to carry the day for Dow like DuPont's is for them. Soon enough...

Profits fell dramatically in the Q3 due to changes in German tax laws, higher domestic tax rates and R&D charges. Despite sales increasing to $13.59 billion from $12.36 billion last year, Dow posted net income after paying preferred dividends of $403 million, or 42 cents per share, compared with a year-earlier profit of $512 million, or 53 cents per share. Dragging Q3 results was a provision for income taxes of $659 million, 5 times larger than the $137 million put aside last year. Excluding items, Dow reported profit of 84 cents per share.

The area I was most interested in was the equity earnings and even there the news was less than encouraging as earnings for Q3 were $296 million – down compared with the record $317 million posted in the same period last year.

There was some good news as Dow reported price increases in every geographic area and across all operating segments, outpacing an increase of almost $400 million in feedstock and energy costs.

Even Dow CEO Andrew Liveris was less than enthusiastic in his comments saying, "Global economic conditions remain reasonably healthy, even though there may be some concerns about the resilience of the U.S. economy going forward." He continued "This was another sound quarter for Dow. We posted record quarterly sales with substantial growth in Europe, Asia Pacific and Latin America; we achieved solid price increases across every business and in every geographic region; we saw strong volume improvements in all but one of our operating segments; and our equity earnings were once again outstanding."

Equity results were good, not outstanding. Outstanding would have been an increase over last year.

Sales are at record levels but feedstock costs are mitigating that. Dow is in the process of moving production to areas where these costs are a fraction of where they are now but that will take time. It will happen and the end results will be fantastic, but until then we have to wait. One good thing about buying shares this cheap now is that there isn't really anywhere for them to go down unless the wheels completely fall off, which is unlikely. Any good news will cause an immediate jump..

Dow is transitioning and doing a great job at it and shareholder need to expect quarters like this every so often. My outlook has not changed long term.

The call today will be interesting...

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