Investors in the chemicals and fertilizer spaces should brace for a wild week ahead as leading companies in each field report their quarterly earnings. Conglomerate Dow Chemical (DOW) is scheduled to release its second-quarter numbers on Wednesday, while fertilizer giant PotashCorp (POT) is expected to announce its numbers Thursday morning.
Unlike the upward-trending broader market, shares of both Dow Chemical and PotashCorp have given mixed signals over the past three months, as evidenced below, leaving investors confused.
While earnings beats could send both stocks soaring, other factors could push them higher even if the numbers don't exceed expectations. Read on to know what they are.
There's a lot going within this company
Analysts see Dow Chemical's second-quarter earnings per share improving about 13% year over year despite flattish revenue. Dow's massive cost-cutting efforts are clearly paying off, and that will likely be the highlight of its earnings report.
Diversity counts among Dow Chemical's strengths. Source: Dow Chemical.
I expect a strong quarter for most of Dow's businesses, including the high-margin polyurethanes, packaging and plastics, coatings, and agriculture segments. Ongoing strength in the U.S. construction and automotive industries, a typically strong selling season in the Asia-Pacific, and robust demand for seeds and crop protection from Latin America ahead of planting season are some factors that should boost Dow's quarterly sales numbers.
However, since Dow is a hugely diversified company, investors shouldn't read much into its quarterly numbers; instead, they should pay attention to its growth strategies. Look for updates about Dow's divestiture plans in its upcoming call, including:
- The spinoff or sale of its chlorine and epoxy businesses, which is expected to generate $3 billion-$4 billion in proceeds.
- Any other nonprofitable businesses that Dow may have decided to exit as part of its restructuring efforts.
Tracking these developments is important for two reasons. First, reshuffling will help Dow channel its resources to more productive uses and emerge a financially stronger company. Second, a substantial portion of the money generated through divestitures will likely go to shareholders. Dow hinted at that when it increased its first-quarter dividend by 15% and announced plans to buy back $4.5 billion worth of shares through the year.
Likewise, keep an eye on the progress of Dow's ongoing Sadara project in Saudi Arabia. The world's largest petrochemical facility, which is expected to go online by 2016, could prove a game changer for the company.
Having trampled Street estimates in three of the previous four quarters, Dow Chemical could deliver another surprise. More important, if the company intends to shed some more assets or boosts shareholder payouts, its shares could easily touch a new high this week.
Better days ahead for PotashCorp?
PotashCorp shares were running strong when a J.P. Morgan downgrade pulled the plug on its rally earlier this month. Unlike Dow Chemical, PotashCorp is going through a difficult phase as it battles tough industry conditions. With profits still hard to come by, expectations for the company's second quarter are muted: Analysts see EPS slumping nearly 38% year over year, driven by 16% lower revenue.
Key nutrient markets maybe finally recovering. Source: PotashCorp.
While those numbers may be uninspiring, investors should look for signals of a turnaround in PotashCorp's earnings call. Several industry developments over the past quarter suggest the worst could be over. Major changes include plans by the world's largest potash producer, Uralkali, to slash output this year to support nutrient prices, along with PotashCorp rescinding some of its previously planned layoffs, citing tightness in granular potash market.
These events suggest two key things: Potash prices may have bottomed out and demand appears to be gathering steam. If PotashCorp confirms this in its earnings call, the stock should go higher.
Meanwhile, look for signs of revival in PotashCorp's phosphate division. A recovering phosphate market should act as excellent support to the company's already strong nitrogen business, thus helping it boost profitability even if potash markets take time to recover. More profits should also mean better returns to shareholders: Given that PotashCorp increased its quarterly dividend by 25% in a year as challenging as 2013, investors can certainly expect more this year.
PotashCorp's second-quarter numbers may leave much to be desired, but an encouraging outlook for the industry and its own cash flow and profitability should propel its shares higher this week.
