Dow Chemical Can't Wait to Announce a Beat


It could have been messy. Dow Chemical (NYS: DOW) had scheduled a release of its quarterly results for Thursday morning. But unnamed operatives precipitously pulled the trigger on Tuesday evening, setting off a scramble to overcome the blunder and set the situation right.

Fortunately, all turned out well for Michigan-based Dow. The post-release call was summarily switched to Wednesday morning, and the company, which was releasing into the teeth of global economic softness, won kudos for topping the consensus earnings estimate. Dow's net income did fall by a not-insignificant 35% to $582 million, or $0.42 a share, from the year-ago $900 million, or $0.69 per share. Its revenue declined by nearly 10% year-on-year to $13.6 billion.

And the beat goes on
But since the analysts' consensus had been at $0.37 per share, all was relatively well for the big company. Indeed, the market Wednesday propelled Dow's shares upward by 4.7%, despite an overall decline in the equity index of the same name, of which the country's biggest chemicals manufacturer is not a component.

In what may appear to be something of a cart-before-the-horse approach, before taking a quick gander at the company's segment contributions, I believe it's noteworthy that CEO Andrew Liveris and his team are clearly focusing on a combination of appropriate controls and focused growth. In the former area, as Leveris said on the call: "... [We] expect to deliver a $1 billion impact next year alone: $500 million of EBITDA and $500 million in capex savings. This speaks clearly to Dow's renewed commitment to operating discipline, streamlining our operations, eliminating structure, and focusing our growth opportunities."

Pink slips aplenty
The former will result in large part from layoffs that will involve about 2,400 employees, or about 5% of the company's global work force. In a related area, fully 20 Dow manufacturing facilities will be shuttered, at least temporarily. Dow joins rival DuPont (NYS: DD) in reducing its employee count as a means of weathering the current global economic storm. But layoffs are not limited to chemical companies. Such diverse companies as Ford Motor (NYS: F) and Advanced Micro Devices (NYS: AMD) have announced similar cutbacks of late.

Conversely, however, Dow is hardly pulling in its horns on all fronts. Rather, it is taking advantage of the increased availability and lower costs of natural gas feedstocks along the Gulf of Mexico coast. In that connection, it has announced that it would build a "world-scale plant" for the production of -- there will be a test -- metallocene ethylene propylene diene monomer, which the company markets under the trademark NORDEL IP Hydrocarbon Rubber.

All but one of Dow's segments experienced sales declines during the third quarter. As you might expect from DuPont's previously announced results, Dow's agricultural sciences unit was the lone exception to the negative trend, recording an 8% higher top line. The other segments (in order of size) are performance plastics, performance materials, feedstocks and energy, and coatings and infrastructure solutions -- all experienced sales reductions of 8%-15%.

Management matters
One of my inviolate approaches to investing involves close attention to my feelings -- visceral though they might be -- to a company's managerial competence. Three-and-a-half years ago I wrote one of several pieces on Dow's success in clearing a host of financial hurdles to acquire specialty-chemicals manufacturer Rohm and Haas. The transaction involved leveraging Dow's balance sheet to the point where it was figuratively groaning. But Leveris and his minions made it work, and paid down the resulting debt at an impressive rate.

It appears that the team is taking the same pragmatic and sensible approach to the current economic malaise. In fact, Leveris summed up that approach effectively on his call:

We are not abandoning all growth projects. In light of the current environment, we are taking a more near-term pragmatic approach, dialing back spending and programs in industries where policy and industry fundamentals have altered the value proposition, such as alternative energy where positive returns are in the far distant future. However, we fully maintain our commitment to funding projects were Dow's differentiation is rewarded even in a weak market environment and margin growth opportunities are more secure.

The Foolish bottom line
My approach to Dow and DuPont -- and in fact to another of my smaller favorite chemicals companies, Celanese (NYS: CE) -- is to watch them closely (but not reach for my wallet) as the overall global economy begins to improve or to soften further. An ideal way to do so is to add their names to My Watchlist.

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David Lee Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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