U.S. chemical kingpin Dow Chemical (DOW) is set to release its second-quarter 2014 results ahead of the opening bell on Jul 23. Last quarter, it delivered a 12.86% positive surprise on strength across its coatings and plastics businesses, supported by gains from emerging markets.
Let’s see how things are shaping up for this announcement.
Factors to Consider This Quarter
Healthy fundamentals are expected to continue across Dow’s coatings and performance plastics businesses in the June quarter. Moreover, the company should continue to gain from strength in the agriculture market driven by higher demand for crop protection products.
Dow is also expected to benefit from its cost-reduction initiatives and restructuring measures. The company’s performance in fast-growing emerging markets is also expected to remain healthy in the second quarter.
However, weakness in Dow’s performance materials and feedstocks and energy businesses may continue, thereby weighing on its top line. Moreover, spending associated with turnaround activities and elevated feedstock and energy costs on a year over year basis may put some pressure on margins in the second quarter.
We expect Dow to provide some color on its portfolio optimization program in the second quarter call. The company is selectively divesting underperforming assets that are exposed to raw material price swings. Dow now plans to raise $4.5 billion-$6 billion from the disposal of non-core assets (including a major portion of its chlorine business) by end-2015.
Dow is also expected to provide an update on its U.S. Gulf coast and Middle East (including the Sadara joint venture) investments that are focused on boosting North American feedstock advantage and are expected to help it achieve its overall EBITDA target of over $10 billion in the near term. Leveraging the abundant natural gas supply and cost advantage, Dow is investing billions of dollars for setting up crackers that produce ethylene from ethane.
Earnings Whispers
Our proven model does not conclusively show that Dow is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Negative Zacks ESP: ESP for Dow is -2.78% – the difference between the Most Accurate estimate of 70 cents and the Zacks Consensus Estimate of 72 cents.
Zacks Rank #3 (Hold): Dow’s Zacks Rank #3 when combined with an ESP of -2.78% makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some other stocks in the basic materials sector you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
LyondellBasell Industries NV (LYB) has earnings ESP of +3.13% and sports a Zacks Rank #2 (Buy).
Potash Corp. of Saskatchewan, Inc. (POT) has earnings ESP of +2.27% and holds a Zacks Rank #3 (Hold).
Albemarle Corporation (ALB) has earnings ESP of +0.92% and retains a Zacks Rank #3 (Hold).
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