Why Dow Could Continue its Rally This Week

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We’ve hit the middle of the earnings season, and already have a good idea of how things are shaping up in many industries. Yet, there’s one that still has its bags full of surprises and disappointments waiting to be thrown up over the next couple of weeks: the chemicals sector.

Several chemical companies will unpack their bags next week, but Dow Chemical (NYSE: DOW) has its appointment right on top in my diary. The hugely-diversified company never fails to awe me, and its stock has held it tight for a month or so. An earnings beat is all it needs to keep the momentum going, especially when the company already seems to be doing a lot of things right.

Better than the Dog of the Dow?

Barring one, I am not expecting much growth from most of Dow’s businesses, be it plastics, coatings, or electronics. Pricing pressure is likely to be high for its fourth quarter across most geographic regions, offsetting volume improvements. Europe is one great woe of Dow’s life, and a twist in the story is still many pages away as the market accounts for more than a third of Dow’s sales.

The business that saved Dow’s third quarter could do it again this time. Those who watched Monsanto (NYSE: MON) stun the Street with solid numbers might have already guessed it: it’s agriculture. If Dow’s agricultural sciences division reported record fourth-quarter sales in 2011, it could be as exciting for 2012 as Latin America warmed up for what could be its best-ever planting season. Monsanto’s sales shot up 21% riding on solid demand for seeds from the region together with pre-spring orders from the U.S. farmers.

Analysts are optimistic about Dow’s fourth quarter, expecting its earnings per share to jump by a sharp 32% from a year ago. Now that’s a huge deviation from where estimates for peer DuPont (NYSE: DD) stand – analysts expect its earnings to stall at just a fifth of what it earned last year. The interesting part is that both these companies reported dismal third-quarter numbers and laid out massive restructuring programs to tame costs. Yet, while DuPont’s stock has lost nearly 5% since mid-October last year, Dow is trading just perfect with 13% gains. Why is the wind favoring Dow?

Double whammy

One major reason that’s holding up Dow’s stock this year is its decision to restart its idle-since-four-years ethylene cracker in Louisiana. Timing couldn’t get any better: Ethane (a nat-gas component used for producing ethylene) prices hit a five-year low at around the same time Dow got the plant back to work. Look at what olefins (ethylene is an olefin product) did to LyondellBasell Industries (NYSE: LYB): operating profits at its largest segment, olefins and polyolefins – Americas surged 28% for the nine months ended Sep. 30, 2012.  Lyondell predicted ethylene to turn out a winner long before Dow realized. Its stock has just hit a fresh 52-week high after clocking massive 49% gains over the past six months alone. Naturally, Mr. Market applauded Dow’s move.

While this news will hold good space in Dow’s upcoming earnings call, it won’t have a bearing on its numbers, nor will it be the only highlight of the call. Here are points you should note down before plugging in the audio jack to your ears on Jan. 30:

  • If Louisiana brought in good news, Dow also found itself mired in controversy as it stepped into 2013. Dow’s latest herbicide-resistant corn, Enlist which was aimed at taking Monsanto’s popular Roundup Ready corn head-on has met with strong criticism even before it is launched. So strong, that Dow could defer its launch by a full year. With the unpleasant event coming up just before spring planting, Dow could have much at stake. Analysts will hope for some clarification on the matter next week.
  • Stakes could be much higher for Dow as it goes on trial regarding a long-pending lawsuit that alleged its role in fixing chemical prices. The company is ready to defend itself, and how things shape up will hopefully be known best in the upcoming call.
     
  • Wait, the list doesn’t end here, although I wouldn’t dare call this one a controversy. After its CEO Andrew Liveris openly voted against the U.S. going for rampant gas exports in the future, Dow has made a brave decision to leave a powerful manufacturer’s association that thought otherwise. I’m sure Liveris will have a lot to say on this next week, and this is one noise my ears will certainly perk up at!

So get ready for lots of opinions, action plans, and of course projections from Dow.  Its guidance for 2013 should largely be an extension of the three primary objectives it outlined earlier – higher earnings and cash generation through cost efficiencies.

Excitement is building up

I am really excited to know about Dow’s plan for 2013, because while at one end it is dialing back up to $500 million in capital spending this year, restarting the ethane cracker clearly proves that Dow isn’t putting growth plans completely on the back burner. The aggressive restructuring moves it outlined in late 2012 should result in a whopping $1 billion of cost savings this year. How is Dow planning to go about it is what will keep me hooked on.

As the dividend aristocrat unveils its earnings report, stay tuned to know what you should make of those numbers. Simply click here to add Dow Chemical to your stock watchlist to stay updated. 


Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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