When you think of fast-growing large caps with pricing power, tech company names like Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT) probably come to mind long before you ever think of Dow Chemical (NYSE:DOW). But how do these numbers grab you?
- Quarterly sales up 31% over last year
- Price hikes of 28% year-on-year for the fourth quarter
- Annual sales up 23% over last year
- Price hikes up 17% year-on-year for the year
Those were just a few of the achievements that this Motley Fool Income Investor pick posted in 2004. Overall, and despite a slew of one-time benefits and charges that skew the results somewhat, Dow managed to increase its profits by 57% in comparison to its 2003 results, earning its shareholders $2.93 per diluted share in 2004.
Most notable of all was how much of the increase in annual sales arose from selling more stuff, and how much came from being able to raise prices on the stuff Dow sold. Specifically, Dow increased the volume of its sales by 6% over last year; but nearly three-quarters of its jump in sales -- 17% of the improvement -- came about from sheer pricing power.
That did wonders for Dow's margins, which have been rising for eight quarters straight now. In 2004, gross margins increased from 13.5% to 14.9% over 2003. Operating margins leapt from 6.1% to 9%. And net margins rose from 5.2% to 7.0%. Impressive indeed.
Earnings quality was also strong. The company's receivables increased by 24% -- slightly faster than sales growth. We'd prefer to see the opposite relationship there, but such a small discrepancy doesn't look too worrisome. Especially when we see that inventories increased only 22.5%, or slightly less than sales growth. After all, when a company raises its prices by 17% in a single year, a little reluctance among customers to pay promptly is to be expected.
In the coming year, Dow sees continued strong demand for its product on the one hand, but higher costs for the raw materials it uses to produce its product on the other. On which situation, CEO Andrew Liveris sagely opined: "We will maintain our focus on financial discipline, controlling those things we can control, as we move forward in 2005." Or as Pooh Bear might have put it:
To know the Way, we go the Way; we do the Way the way we do the things we do. It's all there in front of you, but if you try too hard to see it, you'll only become Confused.
Follow the Way of Dow in:
Fool contributor Rich Smith owns no shares in any company mentioned in this article.
