Chemical giant The Dow Chemical Company (DOW) reported solid fourth-quarter 2010 financial results, which outperformed the Zacks Consensus Estimate, driven by increase in revenue in all its business segments.
Fourth Quarter 2010 Highlights
During fourth-quarter 2010, Dow earned 37 cents per share, ahead of the Zacks Consensus Estimate of 35 cents as well as last year’s 8 cents. However, including one-time charges, the company earned 47 cents compared with 18 cents in the year-ago quarter.
In fiscal 2010, Dow reported earnings of $1.72 per share versus 32 cents in the prior year. Including one-time charges, the company earned $1.97 compared with 63 cents in the prior year.
Quarterly revenues jumped 22% year over year to $13.8 billion and were above the Zacks Consensus Estimate of $12.5 billion. Volume (12%) and pricing (10%) gains across all business segments and geographical regions, particularly North America and Europe, yielded healthy revenue growth. In fiscal 2010, revenues increased 26% to $53.7 billion.
North American revenues grew 16.1% while that of Latin America shot up 15%. Demand increased 6% in Europe, Middle East and Africa, and 6% in Asia Pacific. Latin American volumes were up 5% on stronger demand in the Health and Agricultural Sciences segment. Volume in Asia Pacific inched down 2%.
Agreements of Analysts
Of the 12 analysts covering the stock, in the last 7 days, 1 analyst upwardly revised its estimate for the ensuing first quarter, while 3 of them revised estimates downward. For the preceding next quarter, 3 analysts out of 11, upwardly revised their estimates, while only 1 moved in the opposite direction.
However, 10 analysts out of 17 raised their estimates for fiscal 2011, while none revised their estimates downward. For fiscal 2012, in the last 7 days, 5 out of 13 analysts revised their estimates upward, while none revised their estimates downward.
Dow maintains one of the strongest EBITDA margins in the industry with an increase of over 30% in EBITDA (adjusted) to $1.9 billion. EBITDA margin was up 200 basis points year over year. Dow’s global operating rate was 81%, up 5% year over year but down 5% sequentially.
Magnitude of Estimate Revisions
In synergy with the positive estimate revision trend, the Zacks Consensus Estimate has moved up by 1 cent, in the last 7 days, for the ensuing first quarter and also moved up by 1 cent for the next preceding quarter. However, for fiscal 2011, the Zacks Consensus Estimate moved down by 12 cents, in the last 7 days, whereas for fiscal 2012 the Zacks Consensus Estimate moved down by 17 cents during the same period.
Our Recommendation
Dow continues to deliver cost synergies from the Rohm & Haas acquisition, which is expected to consolidate the higher margin and higher growth specialty businesses while reducing volatility in earnings and cash flow. We believe that management’s strategy of selling equity interests in commodity assets is appropriate, though these units continue to produce good results as the global economy strengthens.
Dow’s net debt is $20.6 billion following completion of the Rohm and Haas transaction and subsequent divestitures, equity offerings, and debt retirement. Dow is focusing on its core business and has been divesting non-strategic assets.
However, we are wary of the macro-trends. Despite excellent fourth-quarter 2010 results, we believe slower recovery in the developed markets of the US and Europe, excess supply conditions in key commodities and higher raw material costs could restrain growth.
Moreover, Dow faces stiff competition principally from EI DuPont de Nemours & Co.(DD). Currently, DOW holds a Zacks #3 Rank (short-term Hold recommendation over the next one-to-three months.
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