Why Shares of the Dow Chemical Company Could Drop This Week

Dow Chemical's first-quarter earnings may disappoint, but that could also mean an opportunity for you.

Apr 22, 2014 at 9:30AM

Having gained 11% year to date, will Dow Chemical (NYSE:DOW) stock maintain its momentum going forward? If you're a Dow investor looking for that answer, you may get it as early as this Wednesday when the chemical giant reports its first-quarter numbers and guides into 2014.

Plenty of restructuring news and strategy updates kept Dow investors excited during the first quarter. Citigroup even upgraded its price targets on Dow and peer LyondellBasell (NYSE:LYB) stocks last month as both companies take advantage of lower feedstock costs to expand their plastics businesses. Given the backdrop, tepid earnings from close competitor DuPont (NYSE:DD) released last week may have left Dow investors in doubt. Will Dow disappoint this week, pulling its share prices down?

Higher costs, lower profits
Half of Dow Chemical's total sales come from its performance plastics and performance materials divisions. Naturally, these businesses play a key role in deciding where Dow's earnings are headed. While the longer-term outlook remains positive, the first quarter could, unfortunately, turn out to be a tough one for the company.

Dow Banner Packaging

Higher input cost could hurt Dow Chemical's plastics business in Q1. Source: Dow Chemical.

Extreme winters fueled demand for natural gas, pushing its prices up substantially. Prices nearly doubled year over year during the first quarter, even crossing $6 per MMBtu at one point in February. That should've rendered a substantial blow to Dow Chemical's margins, since it uses natural gas derivatives as primary feedstock for its plastics business.

Rising costs may also explain why analysts project Dow's Q1 earnings per share to improve just about 4% year over year on 3% higher revenue. Remember that the company repurchased shares during the quarter, which should have also boosted its EPS. In other words, don't expect to see much operational improvement in Dow's Q1 earnings.

Added pressure
The harsh winter could have also taken a toll on Dow Chemical's agricultural sciences business. DuPont reported 6% year-over-year drop in sales from its agriculture business during the last quarter on lower seed volumes from the U.S. Dow derives roughly 13% sales from agriculture, with seeds and traits making up nearly three-quarters of those sales. Furthermore, North America is Dow's largest end market for agricultural products. All that could add up hurting Dow's Q1 top line.

Dow Electronic

Dow's electronics business looks headed for better days.Source: Dow Chemical.

Diversity helps
On a brighter note, I'm expecting stronger numbers from Dow Chemical's other important businesses. While its coatings and infrastructure solutions business should benefit from greater construction activity in the U.S., firm global demand for mobile devices (smartphones and tablets) and improving prospects for semiconductors should propel Dow's electronic and functional materials division forward. The two businesses account for a little over 20% of Dow's sales.

In a nutshell, expect a muted quarter from Dow Chemical. That said, I'd also urge investors to focus more on Dow's strategies and plans for the year ahead, and not read much into its quarterly numbers. There's a lot going inside Dow, and investors can expect comprehensive updates in the company's upcoming earnings call.

Fatter checks for you
Dow Chemical continues to shed unprofitable assets while deleveraging its balance sheet, which should help lower costs and debt burden going forward. That could also free up more cash, part of which could go to shareholders in the form of dividends and buybacks. In its upcoming earnings call, Dow will likely elaborate on projected cash flows for 2014, and how it plans to use them, so make sure you do not miss those details.

Likewise, keep an eye on updates about Dow's game-changing Sadara project, under which it is setting up the world's largest petrochemical facility at Saudi Arabia in collaboration with Saudi Aramco. Dow hopes to get the facility up and running by mid-next year, so the upcoming earnings call should provide key insight into the work progress. If on track, the facility should hit full production by 2016, which should also mark the beginning of a new journey for Dow Chemical.

This week could be an opportunity
Dow's earnings report may not excite investors much, but growth catalysts are aplenty. As LyondellBasell pointed out during its last earnings call, "industry conditions remain favorable for U.S. petrochemicals" if you look beyond the winter-related natural gas price volatility. That should encourage investors to remain bullish about Dow Chemical and even consider any drop in its stock price on weak earnings report an opportunity.

Natural gas may be hurting Dow Chemical, but it can earn you massive profits
You probably know by now how record oil and natural gas production is revolutionizing the United States' energy position. But did you know that you can reap big profits from the energy boom while saving on your taxes? Yes, it's possible. The Motley Fool has identified a small IRS "loophole" that supports your investments in some of America's greatest energy companies. To learn the strategy, and the names of the energy companies taking advantage, grab our special report "The IRS Is Daring You to Make This Energy Investment" today. It's absolutely free -- so click here to access your report before the rest of the market catches on!


Neha Chamaria has no position in any stocks mentioned, and neither does The Motley Fool. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information