Image source: Dow Chemical.
At a time when investors are looking for almost any reason to turn negative on a stock, the big industrial companies don't seem to have a lot to offer Wall Street. Dow Chemical Company's (DOW) recent earnings report was the latest sign of that.
On the surface, the report looked fine, with adjusted net income up 19% to $1.06 billion, or $0.91 per share. But a decline in sales and less-than-bullish comments about China have sent most investors running for the hills, which may create a great buying opportunity for investors willing to focus on the long term.
Image: Dow Chemical.
How sales can fall and profits can jump
One of the strange things happening to Dow Chemical today is the decline in sales while net income is rising. But there are some reasonable explanations for that trend.
On the top line, a strong dollar can make sales overseas look lower than with a weak dollar, even if profits in the local currency were the same. Low oil prices can also have a negative effect on sales for products based on oil. Often these products have dynamic pricing, and in a down oil market, that's a negative for Dow Chemical's sales.
Low oil prices may have a negative impact on the top line, but it also helps lower input costs for chemical products that use it as a raw material. That pushes margins and profits higher, at least in the short term.
While the gyration of revenue may seem like a concern for investors, it's not something to be worried about, because it's just natural in the course of business.
What does the future look like for Dow Chemical?
The bigger question is where Dow Chemical stands in today's competitive market. With a renewed focus on high-value chemicals and engineered agricultural products, the company should be well positioned for high margins in the future.
Rising oil prices and a weakening economy could eat into some of the profits and margin expansion I pointed out above, but for now Dow Chemical looks to be well positioned to slowly grow both revenue and earnings.
Deep value in Dow Chemical
Where Dow Chemical really looks attractive for investors is on the value front. The stock trades at just 13.5 times trailing earnings and, as you can see above, earnings are still growing.
With a strong competitive advantage in both chemicals and agriculture, and a long history of delivering profits for investors, this is the perfect stock for investors looking for value and income on today's market. It's a part of the market that's overlooked, and if the economy goes through a downturn, it could be a great place to have exposure.
