Dow Chemical's (NYSE: DOW) flat revenue and lower earnings in the first quarter aren't enough to scare me. Revenue could go up once things in the industry gather steam, and there was a valid reason for the low earnings. More importantly, Dow seems to be hitting the right note by cutting down costs and increasing investments in areas that could change its fortunes in the future.
Raising hopes
As at DuPont (NYSE: DD), Dow's electronics businesses continued to be a drag. Sales in the electronics and communications division fell by 17% as the industry remained soft because of destocking. Dow fared better, though, with sales in its electronic and functional materials business, which slipped by just 1% from the year-ago period as demand for backlit films remained firm. DuPont expects volumes to pick up in the next quarter.
The agriculture division did well for both companies. Thanks largely to higher corn sales, revenue from Dow's agricultural sciences division climbed 14% from the year-ago quarter. But the most positive sign was the increase in volumes (albeit marginal) in its performance materials and coatings and infrastructure solutions businesses. Volumes in DuPont's performance materials and coatings businesses were lower, but it expects things to start improving on that front in a quarter or two. That raises hopes for Dow, too.
Beyond the ordinary
The sharp dip in natural gas prices has been a boon for chemical makers, since it's one of their key inputs. For Dow, low natural gas prices are also acting as a trigger for some huge investments. It has stood out as one of the few companies ready to give the U.S. some new ethylene plants after a decade-long hiatus. Ethylene has high usage as a petrochemical, and Dow is leaving no stone unturned in ensuring it remains the world's biggest ethylene maker.
After Royal Dutch Shell (NYSE: RDS-A) recently announced that it will build an ethylene cracker that's expected to start operating from 2017, Dow stepped in with a similar plan and will begin construction of an ethylene plant in Texas -- and it, too, will come online in 2017. This move is a part of the company's big plans, announced a year ago, to increase production of ethylene and propylene, which include restarting an ethylene cracker by the end of this year and building new propylene facilities. Dow has already selected Honeywell International (NYSE: HON) to provide it with the technology required for propylene production for one of its plants to be operational in 2015.
Dow's ethylene production capacity in the U.S. will go up by 20% in the next three years thanks to these investments. This should, in turn, add a lot of value through margin expansions to Dow's largest businesses -- performance materials and performance plastics, the two of which accounted for nearly half of Dow's total sales in the first quarter.
More to go
Among other expansionary moves worth mentioning is Dow's recent tie-in with Ford (NYSE: F). The two will develop cheap carbon fiber composites and manufacturing methods that can be applied economically to make vehicles lighter. Dow is also eager to widen the availability of its revolutionary solar roofing shingles, which it launched last year.
While such investments are impressive, Dow is also trying to save through intelligent cost-cutting. Over the next couple of years, it will shut down some insulation-products manufacturing plants in Europe, the U.S., and Brazil. Reducing workforces and consolidating some business assets are also on the agenda. Together, these moves are expected to result in annual savings of around $250 million.
In fact, Dow's first-quarter earnings took a hit primarily because of additional costs pertaining to such restructuring. Although the company reported net income of $412 million, it stood at $714 million if excluding these one-time charges.
The Foolish bottom line
Dow's business diversification is amazing, and so is its focus on each one of them. And did I mention its focus on reducing debt? It cut more than $1 billion worth of red ink during the first quarter, thus improving its total debt-to-equity ratio to 85% from 90% a year ago.
Then there's its handsome dividend yield of 3.7%. In fact, Dow recently raised its second-quarter dividend -- payable in July -- by 28% to $0.32 per share. So if you're interested in a solid growth company that pays out well to boot, Dow's the one for you. Add it to your stock Watchlist to stay updated on all its news and analysis.
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