The Dow Chemical Company (NYSE:DOW) is scheduled to release its earnings for Q2 2012 on July 26. According to our estimates, the two largest divisions of the company in terms of value are the Performance & Plastic Materials and the Electronic & Functional Materials divisions, which contribute 60% and 18%, respectively, to the company’s value. Agricultural Science Products is the fastest growing division and reached new quarterly records in both revenues and EBITDA margins last quarter.
We currently have a price estimate of $31.61, which is about 4% above the market price.
Growth Affected by Global Slowdown
Demand in 2012 has been sluggish owing to the global slowdown, but volumes have started picking up over the course of the year. Last quarter’s revenue drop snapped a string of revenue increases, but things are expected to get back on track this quarter. This is consistent with management’s outlook as well.
We, however, expect revenues and margins in Europe to continue their slow/flat growth trends given the recessionary conditions especially in Western Europe and the deterioration of the Euro against the Dollar. The year-on-year EBITDA margin from operations in Europe has remained relatively unchanged. We do not expect revenue growth in China to maintain its previously high levels due to the relative slowdown in the Chinese economy. This is exemplified by the year-on-year volume decrease in the electronics industry in China during the previous quarter.
Favorable Raw Material Price Movements May Boost Profitability
In such conditions, one major positive is the huge decrease in natural gas prices in the United States owing to the recent boom in the shale gas industry. This could prove beneficial due to reduced costs incurred in raw material purchases. However, other raw material prices such as that of naphtha-based feedstock have not changed and, overall, we expect feedstock and energy costs to be higher in the second quarter.
Restructuring Plan May Have Negative Impact in Short Term
Earlier this year, a restructuring plan was approved and restructuring costs of $357 million were incurred in the previous quarter. This plan was initiated in response to volatile global economic conditions, particularly in Western Europe. It is expected to be carried out over two years, during which there may be a slight decline in margins. However, if the plan is carried out effectively, it could substantially boost profits over the long term.
We expect the Electronics and Functional Materials division, which showed a year-on-year decline in margins during the previous quarter, to show growth from increases in sales volume and prices over the rest of the year.
The Agricultural Science Products division reported record sales in the previous quarter boosted by seasonal factors and global price and volume increases. Also, Dow recently announced a strategic partnership with the Royal Barenbrug Group, which is expected to further maximize the value of this division. Demand for these products continues to increase globally, and we expect consistent long term growth in revenues and margins for this division. Notes:
- Dow Agrosciences, The Royal Barenbrug Group Announce Strategic Relationship, Reuters, June 29, 2012 [↩]