Dow Chemical in Cost Cutting Mode

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Dow Chemical (NYSE: DOW) shot up yesterday on a good profit report. This was good news for the company. But they have since slid back down. There might be a couple reasons for the slide back down that could also point to the beginning of a consolidating or bearish pattern before they continue to move up.

Good Profits, but Missed Revenue

They earned $0.61 per share while analysts projected $0.59. Dow had announced it will take charges totaling approximately $350 million for asset impairments and write-offs, severance and other costs related to these measures. And they did this. Earnings as a whole fell 50% first quarter from its total pre-tax charge of $357 million. It ended up reporting an income of $412 million and $0.35 per share (Jan- Mar) this is not as good as last year, but the real stomper of good news was the revenue expectations. Revenue was flat at $14.7 million while expectations were at $14.96 billion—close but not on target.

Now They are in a Cost Cutting Mode

The slight slowdown in sales is understandable. As Dow has shared in an implementation of cost reductions plan, there is continued weakening in the European economy that is affecting Dow sales. In just one example of a new European turn Britain's economy declined for the second straight quarter, theU.K. government said Wednesday, in a sign that the nation has entered a recession for the second time in four years.

For this reason the company is in a plan to reduce costs. As an example, they will be closing three plants that produce STYROFOAM™ Brand Insulation products located in Estarreja, Portugal; Balatonfuzfo, Hungary; andCharleston, Illinois; and idle a plant in Terneuzen. Quite often, Styrofoam is used in insulation for construction. As we mentioned earlier in Europe aboutGreat Britain, a sharp decrease in construction activity led to the overall decline in the first quarter. Construction dropped by 3% during the three-month period, following a 0.2% dip in the prior quarter. So it makes sense that these types of plants would close.

But at the same time, Dow is expanding and focusing on where it can find profits. It is building a The new ethylene production facility  at Dow Texas Operations will employ up to 2,000 workers at its construction peak. Taking advantage of the low cost and local of the feedstock for its high performance plastics, materials, and advanced material business is a good move for the Chemical Company. They are not the only chemical company expanding at this time. DuPont (NYSE: DD) recently welcomedPuerto Rico government officials at its manufacturing site in Manati for a formal announcement of expansion plans. In this plant and the research center inSalinas, products ranging from materials for solar panels to agricultural goods that help growers protect crops and increase yields.

Will Dow Chemical continue to move up while it is in its cost cutting phase? Every company has to cut costs when the economy demands it. Other companies have started long ago. The key will lie in how Dow Chemical is able to sell over the next couple quarters. It increased its dividend by 28% payable in July and that is good for the dividend investor. But they also want to see growth. They want to see increased sales. It came close this time, narrowly missing revenue estimates. Besides the hype of increased profits (quite possibly due to cost cutting) there was no long term knowledge to celebrate.


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