Dow Chemical Co. (NYSE:DOW) recently reported a solid third quarter, which saw the company's earnings climb despite a drop in sales. The long-term plan to divest from businesses that weren't strategically important is paying off financially.
After the earnings report was released, management talked with analysts about what went well in the quarter. Here were the five biggest takeaways.
Earnings growth is a long-term trend
Quarterly EPS has grown at a 21% CAGR over the last three years on an operating basis. And I think it's important to note that the one-time gains resulting from portfolio actions has resulted in an additional $0.71 of as-reported EPS, above the year-to-date operating EPS of $2.58.
-- Howard Ungerleider, CFO
Dow Chemical's focus on high-margin products has resulted in a long-term improvement in profitability and profits from divestitures. Long-term, that gives management the ability to return capital to shareholders and invest in profitable growth opportunities.
This margin expansion and earnings-per-share growth has been the norm the past few years even as revenue has fallen. If investors keep an eye on one trend over the next few years, it should be whether those margins remain high or if competition slowly starts to creep in.
Sales are down but volume is up
Our disciplined approach to price volume management enabled us to deliver these results even in the midst of ongoing and significant top-line headwinds, with year-over-year price declines in oil of 50% and currency headwinds of 17% for the euro and 51% for the Brazilian real.
There have been a number of negatives Dow Chemical has had to deal with over the last year, like low oil prices and a strong dollar. But the company's strategy of flexible pricing has allowed it to adjust pricing in a way that would increase volume and still expand margins. That's why investors need to look at more than the top line with Dow Chemical to see if the company's business is really growing.
Discipline will remain strong
We're going to continue to accelerate our share buybacks. We will continue to return cash to you. We have no plans for any new big capex or large M&A in this time frame.
-- Andrew Liveris, CEO
One of the traps companies often fall into is spending growing profits on frivolous acquisitions and high-risk growth projects. But Dow has done a lot of work to keep the strategically important high-value businesses and sell off less valuable businesses, allowing for share buybacks and a growing dividend. For now, management has committed to maintaining financial discipline.
More sales could be in order
Despite Dow AgroSciences' being a low-beta business, there is a rationale, in our opinion, that given the potential synergies in a newly consolidating agricultural market, an attractive opportunity to release value may be upon us. As a result, the company is only considering those prospects that will extract further value from this business, while comparing it to the value of retaining the business.
Dow is contemplating whether it's in the company's long-term interest to keep the AgroSciences business in-house, sell it, or form some strategic partnership. It's unknown what the company will do, but with consolidation becoming the norm in agriculture, it's probably in the company's best interests to find a long-term solution soon.
Given that ag isn't currently as big an opportunity as Dow's other businesses and that competitors are improving product offerings, this is another potential opportunity to strengthen Dow's overall business if it can get the right price.
Buying Dow Corning?
Dow and Corning are in discussions around a potential transaction involving Corning's ownership in Dow Corning. We will have more to say on this in the not-too-distant future.
There have been rumors for some time that Dow could buy the half of Dow Corning currently owned by Corning. But there's no deal done yet.
Dow Chemical has divested from a lot of businesses in the past few years, but this could be a big acquisition if it's completed. Given Dow Corning's solid profitability, it could be a nice addition if it can be bought at the right price. And that's probably what's holding up getting a deal done.