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 The Dow Chemical Company (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.
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 Company (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 Fabros Technology, Inc. (NYSE:DFT) 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?
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 NV (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.