Let's get one thing out of the way first of all. When you're talking investing, there are four main "Dows" to consider:
- The Dow Jones Industrial Average
- Dow Jones (NYSE:DJ) -- the company that publishes the DJIA (and several other indexes)
- Dow Corning (a company jointly owned by Dow Chemical (NYSE:DOW) and Corning (NYSE:GLW))
- Dow Chemical itself (which, to judge from this chart, has performed the best of all the "Dows" in recent months)
The last of those four, chemical and plastics conglomerate -- and Motley Fool Income Investor pick -- Dow Chemical, reported its third-quarter and year-to-date earnings late last week. Revenues for the quarter surpassed $10 billion, a 26% increase over Q3 2003. The company converted $617 million of that into profits, for an 86% year-on-year increase, and after accounting for 2.7% in stock dilution, earnings per diluted share increased 81% to reach $0.65.
Year-to-date, the numbers have been even more impressive. Revenues grew more slowly, with "just" a 20.3% increase, but net profits rose 121% to $1.8 billion, and earnings per diluted share rose 115% to $1.87.
What's most impressive about these numbers is that, in the third quarter, Dow broke the revenue gains down into two components. The volume of products sold increased just 7%, but the average price charged for each unit of product sold rose 19%. That speaks to an enormous amount of pricing power. It also suggests a supply/demand imbalance that deprived Dow customers of acceptable lower-priced alternatives for what you'd ordinarily think would be fungible products. After all, we're not talking Exxon Mobil (NYSE:XOM) selling gasoline or Merck (NYSE:MRK) selling drugs to the chronically ill. The two Dow divisions responsible for the largest price increases were Plastics and Chemicals. And the main sellers for the quarter within those divisions appear to have been polyethylene film used in packaging, chlorine, caustic soda (not the kind you find in Coke (NYSE:KO) cans), and vinyl monomers used to manufacture PVC pipe.
The only discordant note in Dow's earnings report came from its cash-flow statement. Year-to-date free cash flow dried up since last year, with under $700 million in actual cash being generated. That's quite a letdown from the year-ago period's $2 billion. Apparently, losses from Dow-affiliated companies and an increase in accounts receivable were to blame for the company's depressed cash generation.
Dow Chemical has so far been one of Income Investor's best performers, returning nearly 17% in combined dividends and capital gains in just over seven months. Take a free trial of the newsletter right now, and you can read Mathew Emmert's write-up on the company for no extra charge. We hope you'll like what you see and stick around for Mathew's two recommendations each and every month.
Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.
