Chemical giant The Dow Chemical Company (DOW) missed the Zacks Consensus Estimate of 56 cents per share with net earnings of 54 cents in the second quarter of 2010. However, reported earnings were far ahead of last year’s income of 5 cents per share.
Including one-time charges related to temporary plants shut down, the company earned 50 cents against a loss of 47 cents in the year-ago quarter. Sequentially, earnings increased 22% from 41 cents per share.
Quarterly revenues climbed 26% year over year to $13.62 billion, but remained slightly below the Zacks Consensus Estimate of $13.69 billion. Pricing (19%) and volume (7%) gains across all business segments and geographical regions, particularly in America and Europe, Middle East and Africa (EMEA) yielded healthy revenue growth. A stronger top-line mitigated higher raw material and energy costs, translating into EBITDA of $1.9 billion, up 21% from the year-ago period.
Segment Review
Electronic and Specialty Materials: The segment was the star performer of the quarter. Sales jumped 19% year over year to $1.4 billion on a 20% rise in volumes. Prices, however, declined 1%. The electronic business saw higher volumes, particularly in Asia-Pacific where volumes grew by 25%.
Dow’s Semiconductor Technologies along with Display Technologies and Growth Technologies delivered strong growth, driven by higher end-market demand for televisions and computer monitors. Sales in the specialty material business were helped by double-digit growth in volumes, especially in Asia-Pacific and Latin America. Earnings nearly doubled to $112 million from last year’s $58 million.
Coatings and Infrastructure: Sales of $1.3 billion were up 16% year over year, primarily driven by pricing gains. Prices improved 11% while sales volumes inched up 5%. The coatings business benefited from higher sales of architectural and industrial coatings while the infrastructure business recorded a double-digit sales improvement, driven by volume gains despite continued weakness in residential and commercial construction end-markets.
Higher demand for insulation products under Dow’s STYROFOAM™ extruded polystyrene foam insulation franchise, especially in North America. EBITDA of $207 million was significantly higher than $25 million in the same period last year.
Health and Agricultural Sciences: This segment’s sales moved up 4% to $1.3 billion in the second quarter, with volume gains of 9% negating price decline of 5%. Production innovations such as pyroxsulam cereal herbicide in Northern Europe and the United States, and penoxsulam rice herbicide in Asia, largely drove the revenues. Higher demand for corn herbicides further added to higher revenues. Dow saw lower prices for its glyphosate in the agricultural chemicals business. EBITDA was $196 million, up from $140 million in the second quarter of 2009.
Performance Systems: Sales in this segment shot up 23% to $1.8 billion, as volume increased 13% and prices surged 10%. A strong rebound in the automotive market led to higher sales in the automotive systems business in North America and Asia-Pacific. Dow saw higher sales of polyurethane glass bonding adhesives and foams, while technology-differentiated products used in acoustics and body structure applications grew 25%. EBDITA, however, declined 14% to $208 million.
Performance Products: Sales soared 35% to $2.8 billion primarily on the basis of higher prices. Prices rose 23% while volumes were up 12%. Polyurethanes business remained strong with higher pricing. Strong demand in electrical laminates in Asia Pacific helped higher sales in the Epoxy business. Polyglycols, Surfactants and Fluids demand remained high across all regions. Adjusted EBITDA for the segment was $314 million, citing a negligible change from $307 million in the year-ago quarter.
Basic Plastics: Basic Plastics sales were up 26% to $3.0 billion. A 33% increase in prices negated volume decline of 7%. The segment benefited from higher polyethylene demand, especially in the packaging markets. However, production disruptions impacted sales in Latin America. The segment’s adjusted EBITDA of $686 million was up 69% from $406 million in the year-ago period.
Basic Chemicals: Sales in the segment went up 25% to $732 million on a 22% rise in prices and a 3% increase in volumes. The Chlor-Alkali/Chlor-Vinyl business contributed largely to the revenues on the back of a recovering alumina and the pulp and paper industries, which led to increased demand for caustic soda, especially in North America. Caustic soda prices continued to improve sequentially. EBITDA for the quarter was $100 million, versus a loss of $32 million in the year-ago period.
Balance Sheet View
Dow has significantly offloaded debt. The Styron divestiture reduced Dow’s debt by $1.9 billion in the quarter. Net debt-to-capital declined to 46.5% to 49% in the first quarter. Cash and cash equivalent of $3.1 billion as of June 30, 2010 were up 7.8% from $2.8 billion as of December 31, 2009.
Outlook
There was no financial guidance from Dow. However, Dow anticipates demand to improve further, especially in Asia with the global economic recovery. However, recovery is likely to be slow in the US and Europe.
Zacks Recommendation
Long-Term View
Dow Chemical continues to make progress in delivering cost synergies from the Rohm and Haas acquisition, which is expected to provide higher margins and consolidate higher growth specialty businesses while reducing volatility in earnings and cash flow. The company realized savings of $325 million in the quarter and a run rate of more than $2 billion.
Notably, Dow surpassed its Rohm and Haas cost synergy goal of $1.3 billion on a run-rate basis for the present quarter. Dow’s global operating rate was 86%, reflecting strength backed by global economic recovery.
Dow is focusing on its core business and has been divesting non-strategic assets. In the reported quarter, the company divested its Styron business for $1.63 billion and plans to divest further $5 billion in non-core assets in the next two years. Last month, Dow announced it plans to be a global sponsor for the Olympics.
Near-Term View
The slow economic recovery in North America is a concern for Dow as it generates about 36% of its revenue from the region. Unplanned production outages are impacting many of Dow’s businesses and higher raw material and energy prices are further pressuring margins.
Last week, Dow’s nearest rival DuPont (DD) reported solid second quarter results. The company recorded a near three-fold increase in quarterly earnings to $1.76 per share. Excluding non-recurring charges, the company earned $1.1 billion or $1.17 per share, outpacing the year-ago earnings of 61 cents and the Zacks Consensus estimate of 94 cents. DuPont also hiked its full-year outlook on the back of a recovering global economy.
Currently, DOW has short-term (1 to 3 months) Zacks #3 Rank (Hold) but a long-term (6 months and higher) Outperform recommendation.
DU PONT (EI) DE (DD): Free Stock Analysis Report
DOW CHEMICAL (DOW): Free Stock Analysis Report
Zacks Investment Research
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Quarterly revenues climbed 26% year over year to $13.62 billion, but remained slightly below the Zacks Consensus Estimate of $13.69 billion. Pricing (19%) and volume (7%) gains across all business segments and geographical regions, particularly in America and Europe, Middle East and Africa (EMEA) yielded healthy revenue growth. A stronger top-line mitigated higher raw material and energy costs, translating into EBITDA of $1.9 billion, up 21% from the year-ago period.
Segment Review
Electronic and Specialty Materials: The segment was the star performer of the quarter. Sales jumped 19% year over year to $1.4 billion on a 20% rise in volumes. Prices, however, declined 1%. The electronic business saw higher volumes, particularly in Asia-Pacific where volumes grew by 25%.
Dow’s Semiconductor Technologies along with Display Technologies and Growth Technologies delivered strong growth, driven by higher end-market demand for televisions and computer monitors. Sales in the specialty material business were helped by double-digit growth in volumes, especially in Asia-Pacific and Latin America. Earnings nearly doubled to $112 million from last year’s $58 million.
Coatings and Infrastructure: Sales of $1.3 billion were up 16% year over year, primarily driven by pricing gains. Prices improved 11% while sales volumes inched up 5%. The coatings business benefited from higher sales of architectural and industrial coatings while the infrastructure business recorded a double-digit sales improvement, driven by volume gains despite continued weakness in residential and commercial construction end-markets.
Higher demand for insulation products under Dow’s STYROFOAM™ extruded polystyrene foam insulation franchise, especially in North America. EBITDA of $207 million was significantly higher than $25 million in the same period last year.
Health and Agricultural Sciences: This segment’s sales moved up 4% to $1.3 billion in the second quarter, with volume gains of 9% negating price decline of 5%. Production innovations such as pyroxsulam cereal herbicide in Northern Europe and the United States, and penoxsulam rice herbicide in Asia, largely drove the revenues. Higher demand for corn herbicides further added to higher revenues. Dow saw lower prices for its glyphosate in the agricultural chemicals business. EBITDA was $196 million, up from $140 million in the second quarter of 2009.
Performance Systems: Sales in this segment shot up 23% to $1.8 billion, as volume increased 13% and prices surged 10%. A strong rebound in the automotive market led to higher sales in the automotive systems business in North America and Asia-Pacific. Dow saw higher sales of polyurethane glass bonding adhesives and foams, while technology-differentiated products used in acoustics and body structure applications grew 25%. EBDITA, however, declined 14% to $208 million.
Performance Products: Sales soared 35% to $2.8 billion primarily on the basis of higher prices. Prices rose 23% while volumes were up 12%. Polyurethanes business remained strong with higher pricing. Strong demand in electrical laminates in Asia Pacific helped higher sales in the Epoxy business. Polyglycols, Surfactants and Fluids demand remained high across all regions. Adjusted EBITDA for the segment was $314 million, citing a negligible change from $307 million in the year-ago quarter.
Basic Plastics: Basic Plastics sales were up 26% to $3.0 billion. A 33% increase in prices negated volume decline of 7%. The segment benefited from higher polyethylene demand, especially in the packaging markets. However, production disruptions impacted sales in Latin America. The segment’s adjusted EBITDA of $686 million was up 69% from $406 million in the year-ago period.
Basic Chemicals: Sales in the segment went up 25% to $732 million on a 22% rise in prices and a 3% increase in volumes. The Chlor-Alkali/Chlor-Vinyl business contributed largely to the revenues on the back of a recovering alumina and the pulp and paper industries, which led to increased demand for caustic soda, especially in North America. Caustic soda prices continued to improve sequentially. EBITDA for the quarter was $100 million, versus a loss of $32 million in the year-ago period.
Balance Sheet View
Dow has significantly offloaded debt. The Styron divestiture reduced Dow’s debt by $1.9 billion in the quarter. Net debt-to-capital declined to 46.5% to 49% in the first quarter. Cash and cash equivalent of $3.1 billion as of June 30, 2010 were up 7.8% from $2.8 billion as of December 31, 2009.
Outlook
There was no financial guidance from Dow. However, Dow anticipates demand to improve further, especially in Asia with the global economic recovery. However, recovery is likely to be slow in the US and Europe.
Zacks Recommendation
Long-Term View
Dow Chemical continues to make progress in delivering cost synergies from the Rohm and Haas acquisition, which is expected to provide higher margins and consolidate higher growth specialty businesses while reducing volatility in earnings and cash flow. The company realized savings of $325 million in the quarter and a run rate of more than $2 billion.
Notably, Dow surpassed its Rohm and Haas cost synergy goal of $1.3 billion on a run-rate basis for the present quarter. Dow’s global operating rate was 86%, reflecting strength backed by global economic recovery.
Dow is focusing on its core business and has been divesting non-strategic assets. In the reported quarter, the company divested its Styron business for $1.63 billion and plans to divest further $5 billion in non-core assets in the next two years. Last month, Dow announced it plans to be a global sponsor for the Olympics.
Near-Term View
The slow economic recovery in North America is a concern for Dow as it generates about 36% of its revenue from the region. Unplanned production outages are impacting many of Dow’s businesses and higher raw material and energy prices are further pressuring margins.
Last week, Dow’s nearest rival DuPont (DD) reported solid second quarter results. The company recorded a near three-fold increase in quarterly earnings to $1.76 per share. Excluding non-recurring charges, the company earned $1.1 billion or $1.17 per share, outpacing the year-ago earnings of 61 cents and the Zacks Consensus estimate of 94 cents. DuPont also hiked its full-year outlook on the back of a recovering global economy.
Currently, DOW has short-term (1 to 3 months) Zacks #3 Rank (Hold) but a long-term (6 months and higher) Outperform recommendation.
DU PONT (EI) DE (DD): Free Stock Analysis Report
DOW CHEMICAL (DOW): Free Stock Analysis Report
Zacks Investment Research
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