Dow Faces Headwinds From Higher Costs Despite Showing Pockets of Growth

by Trefis Team
The Dow Chemical Company
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Dow Chemical (NYSE:DOW) reported lower than expected earnings last Thursday. While the company recorded sales growth in all its divisions and geographies, this increase was neutralized by increases in feedstock and energy costs. As a result, Dow’s earnings per share for this quarter were almost half of the prior year’s levels. Earnings were also depressed by weak product demand, customer destocking and working capital management. A decline in equity earnings due to a compression in polyethylene margins was another factor. The company recorded sales of $14.1B for the quarter, up 5% from the prior year quarter while the company’s EBITDA stood at $1.4B, down 20% from the last year. Dow Chemicals competes with companies like PPG Industries (NYSE:PPG), 3M (NYSE:MMM) and DuPont (NYSE:DD)

We currently have a Trefis price estimate of $39 for Dow Chemical’s Stock, which is 15% above the current market price. We are currently in the process of updating our estimates post the earnings.

See our full analysis of the Dow Chemical stock here

Electrical and Functional Materials

Sales were flat in this segment as volume declines were offset by price increases. The main culprit behind the volume declines were Interconnect and Semiconductor Technologies, both of which faced significantly lower demand. The only segment to report volume growth was Dow Wolff Cellulosics which remained buoyant on resilient food and pharmaceutical demand. The EBITDA margin for this division for 2011 was 24%. Going forward, Dow has set a target to grow at twice the rate of GDP for this division and expects to clock a normalized EBITDA margin of around 25%

Coatings and Infrastructure Solutions

The sales were marginally up by 1% in this segment also as price gains were offset by volume decline. The strongest performer was Dow Water and Process Solutions which posted double digit demand gains. Dow’s Coating Material’s gains were offset by soft demand while Dow’s Building and Construction sales grew by double digits on the back of strong demand from Asia Pacific and Latin America. EBITDA for Coatings and Infrastructure Solutions for 2011 were 17%.

Dow has set a target of 1.5 times the GDP for growth of this division while the normalized EBITDA target is 20-25%.

Agricultural Sciences

This division posted one of the strongest sales growth in 2011. Its sales stood at a record $5.7B primarily driven by the early sowing season in Latin America. This pushed the demand for oils, seeds and traits by ~22% while the demand for agricultural chemicals went up by ~17%. The full year sales of new products accounted for greater than 20% of the sales. The EBITDA of the division for 2011 was around 16%.

Dow has set a target of growth for 1.5 times the GDP while the normalized EBITDA target stands at ~25%.

Performance Materials and Plastics

Performance materials sales grew 4% driven by price. Weak demand due to a warm December in North America was offset by price gain in Polyglycols, Surfactants and Fluids. Oxygenated Solventis implemented the same strategy while weak demand in isocyanates and epoxy hurt results. For performance plastics, sales grew by 5% on the back of both volume rise and price increases. Polyethylene and Dow Elastomers benefited from capacity addition in Thailand while volume growth in Asia Pacific was led by Greater China. EBITDA for performance materials stood at 13% while that for performance plastics stood at 21%.

Going forward, Dow expects to grow performance materials at 1.1-1.3 times GDP while performance plastics at 1.4 times GDP. Normalized EBITDA targets are at 15-18% and 20-25% respectively.

Feedstock and Energy

This division suffered massively as its sales which were up by 14% due to price increase were compensated by a $476M increase in costs. The price rise initiatives were supported by strong demand and tight supply for caustic soda in the alumina and pulp and paper industries. Vinyl chloride sales were hurt due to an asset shutdown in Louisiana. EBITDA for Feedstock and Energy is pegged at 8%.

Dow has significantly cut its targets for this division in 2012. It is targeting a growth equaling GDP while its normalized EBITDA margins are expected to be between 8-12%.

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