Dow Chemicals (NYSE:DOW) recently announced its Q2 earnings results. The company reported sales and operating income growth of 18% and 24% respectively. The robust growth came about as both product prices and volumes rose by 19% and 9% respectively for the company.  This quarter also saw the company shifting its focus towards performance-based plastics over commodity-based ones. Dow Chemicals competes with other global specialty and commodity chemical companies such as DuPont (NYSE:DD), BASF and 3M (NYSE:MMM).
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- Dissecting Dow And DuPont Deal, Part 2: Are The Synergy Expectations Reasonable?
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- Dow Q2 Earnings: Higher Margins Offset Revenue Decline, Dow-Dupont Merger On Pace For Year-End Close
We have a revised price estimate of $39 on Dow Chemicals’ stock, which roughly 10% above the current market price. The adjustment is based on changes to 2011 revenue and EBITDA forecasts for the company’s divisions based on Q2 results as well as changes in the company’s net cash/debt position.
Buoyant Economy Boosts Price and Volume Mix
For Q2 2011, the company saw a consistent increase in sales for all divisions, which was primarily driven by significant price increases across all product segments. Price hikes were especially high for hydrocarbon-based products such as plastics, basic chemicals and high-performance polymers. This should prove to be an advantage for Dow Chemicals in future years, since the company is highly backward integrated (i.e. it manufactures most of the raw materials such as ethylene in-house), enabling relatively higher operating margins on these products. Given the sales growth in the first half of 2011, we expect company sales to exceed to $60 billion for the year.
Plastics Increasingly Becoming Less of a Commodity
An important development this quarter was Dow’s decision to sell its propylene unit to the Brazilian company Braskem.  The sale highlights 2 important strategic goals. Firstly, proceeds from such divestitures will be further used to reduce Dow Chemicals’ debt, which remains a key company priority this year (in the first half of 2011, Dow retired $4 billion worth of gross debt). In the long term, it should also lead to the company’s plastics business being increasingly performance-based as the company shaves off non-strategic assets and focuses on fewer, technology-driven plastics. With the additional past example of Styron’s sale,  we expect Dow’s plastics division to shift from a high-volume, low-margin product to a low-volume, high-margin business. This is also evident from the Q2 results, as Q2 revenue growth from plastics stayed at 9%, compared to 10%-20% increases for other divisions.Notes: