Dow Chemical beats estimates, says economy has found a bottom

Dow Chemical (DOW) shares soared over 10 percent in morning trading after the chemical giant crushed Wall Street's estimates on an adjusted basis. While Dow posted a second-quarter loss, it was mostly driven by charges related to the acquisition of rival Rohm & Haas. Of course, sales in the current global recession were nothing to write home about.

Dow said it lost $486 million, or 47 cents per share, compared with earnings of $762 million, or 81 cents per share during the same period last year. But the quarterly results -- the first to include financial performance data from Rohm & Haas -- also included $957 million in different charges related to the acquisition and to the ongoing restructuring, among others. Excluding one-time items, Dow reported adjusted earnings of 5 cents per share. This was well ahead of estimates for a loss of 8 cents per share, according to Reuters Estimates.

Revenue, however, fell 31 percent to $11.32 billion, down from $16.35 billion in the prior-year period, below estimates of $13 billion. With the lower revenue, it was Dow's aggressive cost cuts that helped profits. The company has cut debt levels, shed assets and about 10,000 jobs. Acquisition synergies also started to play a role in the quarter.

Dow continued to divest assets as part of its strategy to improve cash flow and pay down debt. It said that its Union Carbide subsidiary will sell its Optimal business to Petronas for $660 million. The deal is expected to close at the end of the third quarter. Dow has paid down more than half of the $9.2 billion bridge loan used for the acquisition of Rohm & Haas. As of June 30, the outstanding balance on the bridge loan is $4.1 billion.

Perhaps most importantly, CEO Andrew Liveris said "business results improved sequentially, reflecting volume growth, our ability to hold price in the quarter as well as the acceleration and realization of our cost reductions and synergies." Indeed, Dow reported there have been sequential improvements in EBITDA, the global operating rate has improved, key markets and key businesses also saw volume growth, and prices have stabilized and were flat sequentially.

These improved conditions over the past three months point to an improvement in demand from earlier in the year, signaling the worst of the global recession has passed. Liveris expects strong growth in Asia Pacific, especially China, as the stimulus programs have created strong demand. At home, he says, "the United States economy has found bottom, but will be slow in recovering as unemployment continues to be a drag on consumer spending."

No doubt, it is this projection, more than anything else, that is attracting investors. Of course, the aggressive restructuring program isn't hurting.

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