Usually a decline in revenue isn't met with cheers on Wall Street, but Dow Chemical Co (DOW) is in a unique position to be able to benefit from lower sales early in 2015. The chemicals maker uses oil as an input to many of its products, meaning it can charge its customers less and make more money, even as profits rise.
In today's market, it may be one of the biggest beneficiaries of low oil prices.
The big picture
Overall, revenue dropped 14.5% in the first quarter of 2015 to $12.4 billion. But net income jumped 44.5% to $1.39 billion, or $1.18 per share, which included a number of one-time gains. On an adjusted basis, earnings were $0.84 per share, which was $0.05 ahead of a year ago and $0.06 ahead of expectations.
As we've seen all earnings season, a strong dollar hurt revenues and, for Dow, low oil prices did as well. But oil is also an input to many of its products, making the decline in oil prices a positive for the bottom line.
The good news for Dow Chemical
The value of low oil prices doesn't hit all of Dow's products but it can be seen easily in the performance plastics segment. Sales for that segment were down 23% in the first quarter compared to the year-ago period but EBITDA actually rose 2%. Put another way, EBITDA margins expanded from 17.5% to 23.1%.
A better way to look at Dow Chemical's performance may be through the volume of sales it had in the quarter. On that basis and excluding divestitures, Agricultural Sciences is the only segment where volumes declined (-5%) while Consumer Solutions (+5%), Performance Materials & Chemicals (+5%), and Performance Plastics (+6%) all had solid gains.
Given the margin improvements and the volume growth it looks like Dow Chemical is in a solid position for future earnings growth, whether or not oil prices increase. As CEO Andrew Liveris said this morning, "three-quarters of the portfolio now is in value-add outputs" rather than just making commodity products, which is good for investors long term.
Will Dow Chemical's profit run continue?
Dow Chemical has reported 10 straight quarters of profit growth and the question now is whether the streak continues.
I think the company is well positioned in high value products, which are becoming more important as engineering requirements for products increase. The volume growth in a global economy with a lot of uncertainty early in 2015 is a sign that these products are headed in the right direction.
With shares trading at 14 times 2015 estimates and the stock yielding 3.5% from its dividend I also think there's good value for long-term investors. This won't be a high growth company, but it should continue steady earnings growth long into the future and that's a recipe for solid returns in today's market.
