Dow Chemical Company (NYSE:DOW) recently reported its Q2 2017 results, and it is apparent that the momentum it saw in the first quarter is still continuing. We have been positive about Dow this year, as the pricing pressure has eased off without impacting the volume growth. The company’s nearly 16% revenue increase in Q2 was driven by an 11% volume jump and 5% pricing growth. Sequentially, this represents stronger demand for its products. It is especially noteworthy that Dow managed to sustain meaningful price increases this quarter as well. There is no denying that competition has been fierce in the chemical and seeds industry, and this has impacted prices. However, with the ongoing consolidation, launch of new products and growing feedstock costs, we expect these price increases to continue. This bodes well for Dow, which is sailing smoothly on its way to complete its merger with DuPont. The merger will allow for cost synergies and greater pricing power, thus helping the bottom line further.
Our price estimate of $76 for Dow Chemicals implies 20% premium to the market.
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Why Did Prices Increase This Quarter?
Average prices increased nearly 4% for the infrastructure solutions business, 10% for the performance materials and chemicals business, and 7% for performance plastics. This was driven by higher raw material costs, and tighter supply accompanied by stronger demand for polyurethanes. Additionally, the prices for monomers and ethylene by-products jumped sharply as they tend to be correlated to Brent crude oil prices, which went up 10% during the quarter. However, not all of the price increases translated to proportionally higher profit. The company’s overall EBITDA margin declined slightly, but almost all of that is attributable to a decline in Performance Plastics EBITDA, which suffered under the impact of maintenance turnaround spending and U.S. Gulf Coast start-up and commissioning costs.
Overall, we believe that volume growth with sustained price increase makes for a good near-term story for Dow.
Agriculture Business Rebounded
Dow’s agriculture business had raised some concerns in the first quarter of 2017. The revenue fell nearly 5% as volumes declined and prices remained flat. The demand for herbicides reduced in Asia Pacific and North America, and the demand for corn seeds in North America – and that for sunflower seeds in EMEA and Latin America – suffered. However, the business rebounded in Q2. While overall prices fell 3% due to competitive concerns, volume growth of 6% was a welcome respite.
Dow’s agriculture business may be having its ups and downs, but the company does have something to look forward to. Its proposed merger with DuPont has crossed most of the regulatory hurdles, and DuPont is doing reasonably well in the agriculture segment – thanks to gains in Brazil and the expansion of Pioneer brand seeds and Leptra crop protection products.
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