"Growth in a slow-growth environment" has been the refrain from many companies reporting quarterly earnings this week, and Dow Chemical (NYSE: DOW) was no different. The company reported Q3 operating earnings that beat analysts' expectations and year-over-year revenue growth.
But much of the company's focus is clearly on the impending merger with fellow chemical titan DuPont (NYSE: DD), the prospects of which were clouding an otherwise sunny outlook for the company. Here are the highlights of the quarter.
Dow plans to merge with fellow chemical company DuPont in 2017. Image source: Getty images.
Dow: the raw numbers
| Metric | Q3 2016 | Q3 2015 | Growth (YOY) |
|---|---|---|---|
| Earnings per share | $0.63 | $1.09 | (42.2%) |
| Operating EPS | $0.91 | $0.82 | 11% |
| Sales | $12.5 billion | $12 billion | 4.2% |
| Operating EBITDA margin | 20% | 19.75% | N/A |
Data source: The Dow Chemical Company. Chart by author. YOY = year over year.
What happened this quarter
Operating EPS of $0.91 handily beat analysts' consensus expectations of $0.79, but you'll surely notice the big difference between the company's EPS and operating EPS numbers. This was due to negative one-time items in Q3 2016 and positive ones in Q3 2015. Specifically, in 2015, the company received a $0.32-per-share gain from the Agrofresh divestiture. In 2016, however, the company saw a $0.13-per-share charge related to the Dow Corning ownership restructure and an additional $0.11-per-share charge for various other items, including preparation for the Dow-DuPont merger.
Speaking of the merger, the companies had hoped to receive a final go-ahead from regulators by the end of the year, but EU regulators delayed the decision until February 2017. The companies now expect the transaction to be approved during the first quarter of 2017. While the companies remain publicly optimistic about the success of the merger, any delay is an unwelcome one.
The company's largest segment, performance plastics, saw volume gains outweigh price declines across its portfolio. The segment also saw record third-quarter sales in its packaging and specialty plastics division. In the elastomers division, strong global demand for large vehicles led to higher sales of automotive plastics components, which resulted in record third-quarter elastomers sales for the company as well.
Management's take
Dow Chairman and CEO Andrew Liveris was justifiably pleased with the quarterly results:
We have now achieved four full years -- 16 consecutive quarters -- of year-over-year operating earnings growth and margin expansion ... in the face of a persistently slow-growth global economic environment. ... Our increasingly consumer markets-oriented portfolio was once again on display, with strong results reported in the businesses that serve the packaging, automotive, electronics, construction, and agriculture markets. In our newest business addition -- Dow Corning's silicones business -- we delivered double-digit earnings growth, while disciplined execution yielded synergies ahead of plan. And finally, we were pleased with the ongoing advancement of our strategic growth investments, most notably the successful start-up of the largest unit at our Sadara joint venture and steady progress on our Texas ethylene plant, which is now more than 85% complete.
Looking forward
After four straight years of operating growth and margin expansion, and three of volume expansion, the company naturally expects growth to continue, particularly in in North America and Europe. Management even predicts that Dow's new innovations and products will do even better, outpacing the broader market. Dow hopes to capitalize on growth in Southeast Asia, second-tier cities in China, the Andean economies of South America, and Mexico. It also hopes for a recovery in Brazil.
But regardless of how the market fares, the company's cost-cutting moves in preparation for the merger with DuPont will continue, as will the integration of Dow Corning. Further rewards to shareholders are also likely; in Q3 the company paid out $512 million in dividends to its shareholders and bought back $416 million worth of shares.
But the big question for the company -- and for investors -- is how the merger will shake out. The company is, of course, committed to "successfully closing the DowDuPont transaction," according to Liveris. But many observers have concerns that regulators will quash the proposed merger. Regulators have killed several high-profile mergers and acquisitions this year already.
Ultimately, Dow is looking strong right now. But if the merger goes south, the company's stock price and careful plans will go with it. Wise investors should think carefully before they risk jumping in now.
