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Dow's One Word: Plastics

By Rich Smith – Updated Nov 16, 2016 at 1:14PM

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The chemical giant gets a big boost from its plastics sector.

Mr. McGuire: "I want to say one word to you. Just one word."

Ben Braddock: "Yes, sir."

Mr. McGuire: "Are you listening?"

Ben Braddock: "Yes, I am."

Mr. McGuire: "Plastics."

Ben Braddock: "Just how do you mean that, sir?"

-- The Graduate, 1967

Sometimes, life really does imitate art. Yesterday was one such day, when chemical king and Motley Fool Income Investor pick Dow Chemical (NYSE:DOW) reported a bumper crop of profits for its fiscal first quarter.

Sales for the quarter climbed 25% higher, resulting in year-on-year profits growth of 175% to $1.39 per diluted share. The clear profits driver was its plastics sector, with sales growth clocking in at 35% for the basic plastics unit and 26% for performance plastics. Next came performance chemicals, at 25% growth, the eponymous chemicals division at 16%, and agricultural sciences bringing up the rear at 7%. Combined, the company's two flavors of plastics accounted for the majority of the quarter's revenue at $5.7 billion, vs. $4.5 billion for the other three units combined.

Just as we saw last year, the growth in sales (and as a result, in profits) came in the form of having the pricing power to charge more for the stuff Dow sells, rather than just selling more stuff. Products in the agricultural sciences division were the only ones with less than 25% gains in per-unit pricing, while plastics commanded premiums that were up 36% against the year-ago quarter. What we really saw here was a company that sold 1% fewer goods by volume in Q1 2005 than in Q1 2004 yet nearly tripled its profits. That's fantastic.

As a final check on the quality of these results, let's look at inventories and accounts receivable. Inventories at Dow rose 20% year on year. Considering that sales grew 25%, that's a reasonable increase, and just as with sales, it's likely made up almost entirely of the inventories on hand growing in value rather than volume. On accounts receivable, we saw a 23% decline over the past year. That's both reassuring and eminently logical. If Dow has the pricing power to demand prices as much as a third higher this year than it charged last year, it certainly should -- and apparently does -- have the power to demand prompt payment for its products.

Looks like Mr. McGuire was right after all.

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Fool contributor Rich Smith owns no shares in any company mentioned in this article.

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