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Dow Chemical Weathers Economic Storm

By    |   Friday, 09 Mar 2012 12:58 PM

The European debt crisis and lackluster growth in the United States have taken their toll on earnings at Dow Chemical (DOW), although an improving economy at home will help as it weathers the economic storm.

In the fourth quarter of 2011, Dow reported a loss of 2 cents per share thanks to one-off charges, especially from higher taxes in Brazil. Excluding those charges, Dow earned 25 cents per share, which was still less than what analysts had hoped.

In the fourth quarter of 2010, earnings came to 37 cents a share and to 47 cents per share excluding one-off items. Fourth quarter sales hit $14.1 billion, up 2 percent on year, mainly due to price hikes.

For Dow, less-than-stellar earnings are a macroeconomic story. Just shy of 70 percent of the company's sales take place in two regions: North America and EMEA, short for Europe, the Middle East and Africa.

Overall sales volumes fell 3 percent despite slight increases in Latin America and in the Asia Pacific region, which reflected a steep inventory destocking trend.

"The fourth quarter presented our industry with a challenging operating environment as new uncertainty — driven mostly because of the sovereign debt issues in Western Europe, coupled with traditional seasonality — led to substantial destocking across supply chains as customers reduced inventories prior to year-end," CEO and Chairman Andrew N. Liveris says.

By the second quarter of this year, the company is hoping to see business pick up in the United States and offset weakness plaguing Europe.

Wall Street analysts have taken a wait-and-see approach to the company's stock, but they are anything but bearish. In February, Barclays Capital reiterated an equal weight recommendation on the stocks, while Jefferies reiterated a hold rating, although the investment bank did up its price target.

In October of last year, UBS reiterated a buy rating.

Good chemistry


Ratings agencies have noted Dow is making improvements to its product mix to shield the company from seasonal swings in demand and input prices.

"Dow's improving product mix places greater emphasis on specialty chemicals and materials that offer less earnings cyclicality than commodity chemicals and plastics, and it has leading market positions in most of its core product categories," Standard & Poor's analysts wrote in a late 2011 note on the company.

"Dow's value-added product mix and focus on less-cyclical markets should help it to decrease the volatility of operating results over a business cycle, compared with its historical performance, and fits well with Dow's existing emphasis on technology."

Company executives aren't expecting business to pick up during the first quarter of 2012, as the European debt crisis will continue to hamper sales. By the second quarter, however, they expect to see business ramp up.

"We do not anticipate material improvements in market conditions for the first quarter of the year, but do project economic recovery will gain momentum as we move through the second quarter and the remainder of the year," Liveris adds.

"We will continue to diligently manage our business and control the factors that we can in order to continue to generate healthy cash flow, fund organic growth and remunerate shareholders."

The company will unveil first quarter earnings on May 3.

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2012-58-09
Friday, 09 Mar 2012 12:58 PM
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