Dow Chemical's (DOW) Q1 Earnings Top, Profit Shoots Up

Dow Chemical (NYSE:DOW) topped earnings expectations in first-quarter 2017, helped by its cost-cutting and productivity actions and continued focus on consumer-driven markets.

The U.S. chemical giant registered adjusted earnings (barring one-time items) of $1.04 per share for the quarter that zoomed past the Zacks Consensus Estimate of 99 cents.

On a reported basis, the company registered a profit of $888 million or 72 cents per share, a more than five-fold surge from a profit of $169 million or 15 cents per share recorded a year ago. The results in the reported quarter include charges related to transactions and productivity actions and an arbitration matter in Dow AgroSciences.

Dow raked in net sales of $13,230 million, up roughly 23% year over year, driven by the acquisition of Dow Corning’s silicones business. Sales also surpassed the Zacks Consensus Estimate of $12,367 million. The company witnessed sales gains across all geographic areas in the reported quarter.

Volumes (excluding acquisitions) rose 4% in the quarter, aided by healthy demand across the company’s key end-use markets of packaging, transportation, infrastructure, consumer care and electronic materials. Gains were witnessed across all geographic areas.

Segment Highlights

Agricultural Sciences: Sales fell roughly 5% year over year to $1.6 billion in the reported quarter on lower volumes that declined 5% in the quarter.

Consumer Solutions: Revenues from the division were roughly $1.6 billion, up around 51%, supported by the addition of the silicones business. Sales gains were driven by broad-based volume growth that more than offset lower pricing. Volumes jumped 53% in the quarter.

Infrastructure Solutions: Sales from the division jumped around 58% to $2.5 billion in the quarter driven by the addition of the silicones business, broad-based volume gains and a modest rise in price.

Performance Materials & Chemicals: Revenues went up 12% to $2.4 billion in the quarter. Volume rose on gains in all geographies and businesses.

Performance Plastics: Sales climbed 20% to $5 billion with gains witnessed in all businesses barring Dow Electrical and Telecommunications.

Financials and Shareholder Returns

Dow had cash and cash equivalents of roughly $5.8 billion at the end of the quarter, down around 12% year over year. Total long-term debt rose around 27% year over year to roughly $21 billion.

Outlook

Dow is witnessing signs of positive economic momentum globally amid sustained geopolitical risks and volatility. While gradual recovery in Europe continues, the U.S. is showing strong momentum riding on healthy consumer demand and a resurgent manufacturing sector.

The company is also seeing early signs of gradual improvements in consumer-led markets in Latin America. The company believes that the strength of its portfolio coupled with its focus on consumer-led markets will continue to serve it well in this backdrop.

Dow has outperformed the Zacks categorized Chemicals-Diversified industry over a year, supported by sustained healthy growth fundamentals in its core end-use markets. The company’s shares have gained around 19.3% over this period, compared with roughly 16.4% gain recorded by the industry.

Dow should continue to gain from its productivity improvement and cost control actions. Moreover, the company 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.

Dow and DuPont (NYSE:DD) , in Mar 2017, said that the European Commission (EC) has conditionally approved their proposed mega-merger. The approval, which came after both companies committed to sell major portions of different businesses, is a major step toward closing the merger transaction. The approval is conditional on the companies fulfilling the commitments given to the EC in connection with the clearance. The companies expect to close the merger in Aug 2017.

Zacks Rank & Key Picks

Dow is a Zacks Rank #3 (Hold) stock.

Better-placed companies in the chemical space include The Chemours Company (NYSE:CC) and Kronos Worldwide, Inc. (NYSE:KRO) , both holding a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chemours has an expected long-term growth of 15.5%.

Kronos has an expected long-term growth of 5%.

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