Dow Chemical Warms Up for Q3: Will It Beat Earnings Again?

Dow Chemical (DOW) is set to release its third-quarter 2014 results ahead of the bell on Oct 22. Last quarter, the U.S. chemical kingpin delivered a 2.78% positive surprise on higher sales across all segments, marking its third straight earnings beat. It saw gains across most geographic regions in the quarter.

As Dow’s products have application in almost every industry, its third-quarter results will shed light on end market scenario and demand trends for chemical products across a wide gamut of industries and provide color on how the chemical industry is faring in the second half.

Dow has beaten the Zacks Consensus Estimate in 3 of the trailing 4 quarters with an average beat of 14.85%. The Zacks Consensus Estimate for Dow for the third quarter has remained unchanged at 67 cents per share over the last 7 days.

Is the company poised for another wining quarter? Let’s see how things are shaping up for this announcement.

Factors to Watch For

Healthy momentum is expected to continue across Dow’s electronics, coatings and performance plastics businesses in the September quarter. The performance plastic franchise is expected to put up a strong performance in the quarter on the back of healthy demand and favorable pricing.

Moreover, Dow is expected to gain from its productivity and growth actions as well as its aggressive cost-reduction initiatives. The company’s performance in fast-growing emerging markets is also expected to remain healthy in the third quarter.

While fundamentals in the agriculture market remain strong, sales in Dow’s agricultural sciences unit are expected to decline on a sequential basis in the third quarter due to seasonal factors. In addition, higher spending associated with turnaround activities on a year over year basis may put some pressure on margins in the quarter. Dow’s performance materials business also remains exposed to certain industry-specific challenges.

We also expect Dow to provide some insights on its portfolio optimization program in the third quarter call. The company is selectively divesting underperforming assets that are exposed to raw material price swings.

Dow, in late 2013, revealed its plans to exit a major portion of its chlorine business that has been in operation for over 100 years. Commodity chemicals assets that are being identified for separation represents up to $5 billion in revenues. Dow expects to raise $4.5 billion-$6 billion from the disposal of non-core assets 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. Dow is investing billions of dollars for setting up crackers (produces ethylene from ethane) leveraging the abundant natural gas supply and cost advantage.

Earnings Whispers

Our proven model shows that Dow has the right combination of two key ingredients to beat earnings.

Positive Zacks ESP: The Earnings ESP (Expected Surprise Prediction) for Dow is +4.48% — the difference between the Most Accurate estimate of 70 cents and the Zacks Consensus Estimate of 67 cents. This indicates a likely positive earnings surprise.

Zacks Rank #3 (Hold): Dow’s Zacks Rank #3 increases the predictive power of its ESP. Note that stocks with Zacks Ranks of #1, 2 and 3 have a significantly higher chance of beating earnings. Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

Stocks That Warrant a Look

Here are some other chemical companies 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 +2.21% and holds a Zacks Rank #2 (Buy).

Celanese Corp. (CE) has earnings ESP of +4.86% and carries a Zacks Rank #3 (Hold).

Cytec Industries Inc. (CYT) has earnings ESP of +1.39% and sports a Zacks Rank #3 (Hold).