A weak global economy and low oil prices wreaked havoc on Dow Chemical Co's (NYSE:DOW) revenue in the first quarter of 2015. But the company still managed to post a double-digit increase in earnings, continuing an impressive run.
But earnings season is about more than just the numbers. Investors are looking at what management says and how the company says it to give them a peak into the future, and the conference call is the best place to do that. Here were the five biggest takeaways CFO Howard Ungerleider delivered on Dow Chemical's earnings call with analysts.
Beyond the drop in sales
Volume increases were led by Performance Plastics, up 6%, and Performance Materials & Chemicals and Consumer Solutions, both up 5% despite 15% price declines at the company level, primarily due to significant oil and currency headwinds.
With a company like Dow Chemical, it's important to look at more than the top line revenue number for growth. Commodities can send the prices of its products sharply higher or lower, depending on the quarter, and a huge drop in oil prices did just that in the first quarter.
The fact that volumes were up for Dow Chemical was a strong sign, especially if low oil prices continue. I look at this and increasing margins (which I'll get to below) as the two biggest reasons to be bullish on the stock.
Water will be big business
In Energy & Water Solutions we expect continued growth at 2 to 3 times the rate of GDP, with strength in our water business offsetting weakness in North American energy markets.
The drought in California highlights the challenges inherent in providing water for the world's 7 billion people. Energy hasn't been on the same upswing, but if oil prices pick up the Energy & Water Solutions business could be a major growth driver for Dow Chemical.
Margins are driving earnings
EBITDA margins expanded to the highest levels since 2005, up 284 basis point versus the year-ago period.
Revenue may have been down in the first quarter, but margins were up nearly 3%, which is what drove the growth in net income. Low oil prices helped, but another driver was the company's long-term strategy of moving into high value add, high margin chemicals. That will help drive margins higher in the future, so even if revenue doesn't grow this year it will be possible to have a great year on the bottom line.
Guidance looks strong
We expect [second quarter] year-over-year demand growth in most businesses, with pricing momentum building through the year. We expect raw material costs to remain favorable year-over-year, with stable natural gas, though oil-based costs may rise.
Dow Chemical has positioned itself in growing chemicals markets that should continue to strengthen as the need for high specification products increases. That's reflected in this comment about growing demand (volume) in most businesses in the second quarter.
Asset sales will continue
[L]ate last year we increased our divestiture target to $7 billion to $8.5 billion and said we expected to achieve that target by mid-2016. With the actions announced this quarter, we have now outperformed this target and expect considerations from divestiture actions to now exceed $11 billion.
Dow Chemical seems to be divesting from some of its businesses at exactly the right time. It's expecting to get about $11 billion for businesses it expected to sell for $7 billion to $8.5 billion, and what's left should be a stronger, more premium company.
The moves management has made have also resulted in the higher margins I discussed above, so at the end of the day Dow Chemical should be a better company with a stronger balance sheet than it was before making these divestitures.
Positioned for the long-term
You won't see Dow Chemical on any list of high growth companies, but it's well positioned in the chemical and agriculture markets to continue to churn out cash flow and profits year after year. For investors looking at the company's 3.5% dividend yield, I think that's the best reason to be bullish on the stock. The payout easily exceeds treasuries, and with the upside potential from the stock if earnings grow, I think it's a safe place to put your money today.