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Dow Chemical (DOW) Q1 Earnings Top, Charges Hit Profit

Dow Chemical DOW continued its positive surprise streak with solid earnings beat in the first quarter of 2016.  The U.S. chemical giant registered adjusted earnings of 89 cents per share for the quarter that outstripped the Zacks Consensus Estimate of 83 cents. The results were driven by strong margins, aided by the company’s cost-management actions.

The quarterly results exclude charges (of 70 cents per share) associated with legal settlements and costs related to portfolio and productivity actions. Including these items, the company logged profit of $169 million or 15 cents per share, a roughly 88% plunge from $1,393 million or $1.18 per share recorded a year ago.

Dow’s EBITDA margin (as adjusted) reached the highest level in more than a decade in the quarter with gains recorded in most operating segments, notably Consumer Solutions and Agricultural Sciences.

However, Dow’s revenues dropped roughly 13% year over year to $10,703 million with declines witnessed across the board. Lower pricing and currency headwinds (stemming from a stronger dollar) hurt revenues in the quarter. Sales, however, came ahead of the Zacks Consensus Estimate of $10,478 million. Volumes (excluding divestments and acquisitions) rose 4% in the quarter.


Segment Analysis
Agricultural Sciences

Sales fell roughly 16% year over year to $1.6 billion in the quarter, hurt by currency headwinds and lower crop commodity prices. Crop protection volumes declined on lower demand for herbicides. Seeds volumes fell due to weak demand for corn and soybeans.

Consumer Solutions

Revenues from the division were $1.05 billion, down 6%, as increased demand for differentiated solutions in the automotive market was more than offset by price declines and currency impact.

Automotive Systems delivered volume gains, aided by strong demand for light-weighting technologies and sound-dampening solutions. Volumes fell slightly in Electronic Materials as healthy momentum in semiconductor and display technologies was more than offset by lower demand for applications tied to personal computer components.

Infrastructure Solutions

Sales from the division slipped around 13% to $1.6 billion in the quarter as higher sales in building and construction business were more than offset by declines in other areas.

Volumes rose by double digits in the company’s building and construction business on gains across all geographic areas. In Energy and Water Solutions, volumes fell on weak demand in oil and gas exploration markets, especially in the U.S. Coating materials volumes rose on strong end-market demand.

Performance Materials & Chemicals

Revenues slid 32% to $2.2 billion in the quarter, reflecting the impacts of divestments. Polyurethane volumes rose on higher demand for downstream, higher-margin system house applications and specialty polyols. Volumes fell in the industrial solutions business.

Performance Plastics
Sales fell roughly 2% to $4.2 billion, impacted by lower hydrocarbon pricing. Packaging and Specialty Plastics business saw record polyethylene sales volume. Elastomers business also registered higher volumes. Moreover, Electrical and Telecommunications volumes rose by double digits in the quarter.

Financials and Shareholder Returns
Dow had cash and cash equivalents of roughly $6.6 billion at the end of the quarter, up around 5% year over year. Total long-term debt fell around 15% year over year to roughly $16.5 billion. Dow returned $506 million to its shareholders through dividends in the quarter.

Moving ahead, Dow sees sustained momentum in consumer driven end-markets, especially packaging, transportation and infrastructure. It expects strong demand in North America and gradual recovery in Europe. The company will remain committed to operational, commercial and project execution to deliver value to customers and boost shareholder returns.

CEO Andrew N. Liveris said that Dow will remain focused on its productivity actions, innovation and strategic growth measures in a still uncertain macro environment.  

Dow is expected to continue to gain from its productivity and growth actions. Moreover, it remains committed to invest in attractive regions through highly-accretive projects including the expansions in the U.S. Gulf Coast and Sadara joint venture in the Middle East.

The company’s propane dehydrogenation unit ("PDH") in Freeport, TX, started commenced commercial operations in Dec 2015 and is now operating at full capacity. The PDH unit represents a major part of Dow’s roughly $4 billion U.S. Gulf Coast investments.

Dow is selectively spinning off or selling its underperforming assets and gradually shifting to high-growth markets. The company, in Oct 2015, wrapped up the separation of a major portion of its chlorine value chain and merger of those businesses with chemical maker Olin Corp. OLN. The disposal of the chlorine assets represents a significant part of Dow's aggressive portfolio management actions as it is looking to move away from cyclical commodity chemicals businesses.

Dow and DuPont DD agreed to combine their businesses in Dec 2015 in an all-stock deal to create a chemical powerhouse with a combined market value of around $130 billion, before eventually breaking up into three independent companies through tax-free spin-offs. The deal is expected to complete in second-half 2016. The merger is projected to deliver cost synergies of around $3 billion, expected to be achieved with the first two years after the deal closure.

Dow carries a Zacks Rank #2 (Buy).

Another well-placed company in the diversified chemical space is Air Products and Chemicals, Inc. APD, with the same Zacks Rank as Dow.

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DU PONT (EI) DE (DD): Free Stock Analysis Report
DOW CHEMICAL (DOW): Free Stock Analysis Report
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OLIN CORP (OLN): Free Stock Analysis Report
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