Dow Chemical DOW is set to release its first-quarter 2015 results ahead of the bell on Apr 23. Last quarter, the U.S. chemical kingpin delivered a 25% positive surprise on broad-based volume gains. The company also benefited from higher demand across major end-use markets and productivity improvement actions.
As Dow’s products are used in almost every industry, its first-quarter results will shed light on end market scenario and demand trends for chemical products across a bevy of industries.
Dow has beaten the Zacks Consensus Estimate in the trailing 4 quarters with an average beat of 12.03%. The Zacks Consensus Estimate for Dow for the first quarter has increased by a penny over the past month to 78 cents per share.
Is the company poised for another wining quarter? Let’s see how things are shaping up for this announcement.
Factors to Watch For
Dow, in its fourth-quarter 2014 call, said that it envisions favorable demand fundaments amid an uncertain operating backdrop and currency headwinds. The company also expects continued volume growth in the March quarter.
Margins in Dow’s performance plastics businesses are expected to remain healthy in the first quarter, although moderated by headwinds from reduced oil and gas prices. Moreover, the company’s strategic actions are expected to lead to improved margins in its performance materials and chemicals business.
Dow, however, is faced with pension and currency headwinds. The company expects pension costs to increase more than $100 million year over year this year, partly due to lower discount rate. Moreover, Dow sees unfavorable currency translation to impact its EBITDA in 2015 and continue to weigh on pricing in the near term. Moreover, higher spending associated with turnaround activities may put some pressure on margins in the quarter.
Nevertheless, Dow is also expected to continue to gain from its productivity and growth actions. The company has announced an additional $1 billion three-year productivity program. It expects to generate around $300 million improvements by end-2015.
Dow is also selectively divesting underperforming assets that are exposed to raw material price swings. The company is exiting a major portion of its chlorine business that has been in operation for over 100 years. Dow, last month, announced that it will divest a considerable portion of its chlorine value chain and merge that with Olin Corp. OLN in a deal valued at around $5 billion.
With the transaction, Dow expects to exceed its target of divesting $7 billion to $8.5 billion of non-strategic businesses and assets. The company is expected to provide some additional details on this deal in its first-quarter call.
We also expect Dow to provide an update on its U.S. Gulf coast and Middle East investments that are focused on boosting North American feedstock advantage. 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 +11.54% – the difference between the Most Accurate estimate of 87 cents and the Zacks Consensus Estimate of 78 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 Rank of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and 5) should never be considered going into an earnings announcement.
Stocks That Warrant a Look
Here are some other companies in the chemicals space you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Trinseo SA TSE has an earnings ESP of +39.62% and holds a Zacks Rank #3 (Hold).
International Flavors & Fragrances Inc. IFF has an earnings ESP of +2.82% and carries a Zacks Rank #3 (Hold).
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