"Second verse same as the first."
-- Herman's Hermits, "I'm Henry the VIII, I Am"

The first quarter's oversized profits got even bigger in the second quarter for Motley Fool Income Investor recommendation Dow Chemical (NYSE:DOW). Revenue increased a strong 16%, and net income, after one-time events, rocketed 69% over the comparable year-ago quarter.

That's great news, except for one thing: Revenue and earnings, both all-time records for the quarter, fell slightly short of analyst estimates.

My earnings preview two weeks ago forecast that weak ethylene prices in April and May would moderate Dow's results. While the company acknowledges that headwinds did hinder ethylene results, revenue still increased 19% and operating profits more than doubled (24.2% of total sales but 30.9% of operating profits) in plastics, ethylene's home business segment, net of gains associated with divestiture in 2004. A 22% increase in prices more than overcame a 3% shortfall in volume caused by divestitures.

That pattern of weak volume but strong pricing was evident throughout the company's results. Overall, volume was down 4% (mostly because of divestitures), but prices rose 20%. For now, high feedstock and energy costs, which added almost $900 million to second-quarter costs, are being more than offset by strong prices.

So why did earnings miss analyst estimates by $0.02 a share? One significant cause mentioned during this morning's conference call was the unplanned manufacturing-plant outages at Dow and joint venture partners -- outages that may have cost the company as much as $0.05 per share this quarter.

Looking ahead, both Dow and competitor Lyondell Chemical (NYSE:LYO) say that market conditions for ethylene, co-products, and derivatives have strengthened. The Fitch Ratings service is also forecasting little downside risk for pricing in the second half of 2005.

Overall, the company says price and volume trends have once again turned positive for virtually all segments. The third quarter will be strong, 2005 will report record earnings, and 2006 should see further earnings growth.

Dow's stock is priced at 10.5 times 2005 forecasted earnings and 8.4 times 2006 estimated earnings. That 2006 multiple compares favorably with DuPont's (NYSE:DD) 13.8 and BASF's (NYSE:BF) 10. While Lyondell trades at 6.3 times 2006 earnings, its much higher debt-to-equity ratio also means that it carries much greater risk when the business cycle turns (as it will) from today's sunny outlook.

Since featured in the April 2004 issue of Income Investor, Dow Chemical has registered a 27.1% total return -- including dividends, where the current yield is 2.8%.

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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.