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Dow Chemical tops earnings estimates via strong profits on plastics

04.23.2014  | 

CEO Andrew Liveris said the plastics unit has the advantage of energy and raw materials that are relatively cheaper in North America amid a boom in gas production from shale rock.



Dow Chemical, the largest US chemical maker, posted better-than expected profit for the first quarter after its plastics unit sold out and sales volumes increased at the company’s paints ingredients business.

Net income rose to 79 cents/share from 46 cents a year earlier, Midland, Michigan-based Dow said. That topped the 71-cent average of 17 estimates compiled by Bloomberg.

Plastics, Dow’s biggest business by revenue, saw profit gain 5% on higher prices. CEO Andrew Liveris said the unit has the advantage of energy and raw materials that are relatively cheaper in North America amid a boom in gas production from shale rock. Dow is adding plastics capacity in Saudi Arabia and the US, which will use low-cost natural gas liquids such as ethane, starting next year.

“We are sold out globally” in plastics, he said in a telephone interview. “The industry is not sold out, because most of the industry is located outside North America running on high cost inputs.”

Dow rose 2.2% to $50 at 8:43 a.m. before the start of regular trading in New York.

“In an otherwise volatile energy quarter, these guys managed to generate year-on-year earnings margin growth,” said Hassan Ahmed, a New York-based analyst at Alembic Global Advisers who recommends buying the shares. “No one was expecting beats from anybody because of North American weather, so for these guys to handily grow earnings, it’s impressive.”

Agriculture Gains

Sales climbed to $14.5 billion from $14.4 billion, missing the $14.7 billion average of 13 estimates.

The coatings segment, which supplies paint makers, posted a 20% gain in profit. The agriculture unit reported higher earnings on improved pesticide sales and cost cuts.

Across all products, Dow’s average realized prices were unchanged. On a segmental basis, the plastics unit recorded the only gain, with prices rising 4%. Company-wide volumes increased 1%, led by a 6% improvement in coatings.

Dow said its costs for energy and raw materials rose $300 million. Propane, a natural gas liquid used to make propylene and plastics, spiked to a record in the US during the quarter amid an unusually severe winter.

Third Point LLC, the hedge fund founded by activist investor Dan Loeb, said in a Jan. 21 letter that Dow is its top holding and could add billions of dollars to earnings by spinning off commodity chemicals and plastics. Dow on Feb. 12 rejected the proposal, saying commodities need to be integrated with specialty products to maximize value for all shareholders.

Asset Sales

Dow today reiterated its plan to sell underperforming assets worth $4.5 billion to $6 billion by the end of 2015.

In January, Dow tripled its share buyback program to $4.5 billion and raised its dividend. The company said today it repurchased $1.25 billion of shares in the first quarter.

Sadara, Dow’s $20 billion joint venture with Saudi Arabian Oil Co., is scheduled to begin production at its first units in late 2015. Dow also is building plants in the US to convert inexpensive shale gas into propylene and ethylene. Dow expects the US and Saudi projects to add $3 billion to annual earnings after 2017.

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