Dow Chemical Shares Off After 4Q Beat
(Dow Chemical earnings story updated to provide further analyst commentary as well as detail from Dow's fourth-quarter report. Also updated for closing stock prices.)
NEW YORK (
) -- Investors sold off
Dow Chemical
(DOW) - Get Report
shares after the company reported slightly better-than-expected quarterly results in what has become a dominant trend this earnings season.
The stock retreated by as much as 6.6% to $26.74 Tuesday morning on heavy volume, but clawed back some of those losses by the close of trading. Dow shares ended the session at $27.57, down $1.06 cents, or 3.7%, on volume of 28 million shares. The daily average turnover in the name is 9.8 million shares.
The Midland, Mich., chemical giant said before the opening bell that strong business in developing countries -- or "emerging markets," depending on your favored nomenclature -- helped the company overcome weak sales in the recession-laden U.S. and Europe. Its fourth-quarter earnings of 18 cents a share (excluding items) surpassed the Wall Street target of 11 cents. The results also reversed a big loss from a year ago, when the company began to feel the full impact of the recession.
But the earnings beat may have been exaggerated by a lower tax rate booked by Dow during the quarter. According to the reckoning of Frank Mitsch, an analyst at BB&T Capital Markets, the lower taxes resulted in a profit boost of about 5 cents a share.
Short-term technical traders were looking to see where Dow Chemical shares would close Tuesday. Above $28.50, and it's a bullish signal. Below an important support level of $27, and it's bearish, said Mike Bellafiore, a partner at SMB Capital in New York. And if it ends anywhere in between, as it did Tuesday? Apparently it's wait-and-see.
From a fundamental perspective, the health of Dow's business depends on a rebounding economy. Michael Judd, an analyst at Greenwich Consultants, was cautious on the stock. If the customers of big cyclical companies like Dow have spent recent months restocking inventories depleted during the recession, Judd said, "and if we see more economic weakness, these stocks are just going to get killed."
Noting the huge rise in Dow shares amid the broader bull run the second half of 2009, Judd added: "If I were a
Dow shareholder, I'd want to take some profits."
BB&T's Mitsch noted some apparent contradictions in Dow Chief Executive Andrew Liveris's commentary on the company's outlook in the earnings press release. On the one hand, the Dow boss said emerging market strength would provide the company with sustained growth. On the other hand, Liveris cautioned that growth will "continue to lag" in the U.S. and Europe. And on a third hand (so to speak), Liveris cited a range of factors -- especially the broader portfolio of products contributed by Dow's once-troubled acquisition of specialty chemicals maker Rohm & Hass -- that would drive earnings growth in the future.
Sustain, lag, drive -- those are three not-necessarily-coherent ideas. "Take your pick," wrote Mitsch in a note to clients early Tuesday morning.
Dow shares have skyrocketed since last March when they fell to under $6 apiece at the nadir of the bear market. But it wasn't simply macro-economic recessionary weakness, and stock-market selling, that killed Dow's share price. The company was then struggling with its purchase of Rohm, a deal struck before the financial crisis when banks were throwing cheap money at corporate M&A adventures of every kind.
Dow's debt woes became an order of magnitude greater when a joint-venture deal with Kuwait to build a plant in that country fell through at the last moment, depriving Dow of $9 billion in funds it would have used to help pay for Rohm.
To make up for that huge financing gap, Dow has shed billions of dollars worth of assets (and it's preparing to sell more). Litigation spawned from the failed Kuwaiti deal is ongoing.
Meanwhile, Dow has emerged from the ashes -- its stock touched a 52-week high of $31.66 on Jan. 6 -- and has sought to recast itself in an aggressive marketing campaign as a dynamic company poised for high growth, a hope based in large part on the more profitable and more specialized products that Dow brought into its fold with the acquisition of Rohm & Haas, which eventually closed last April.
The addition of Rohm helped Dow -- whose base-materials products are used to make a dizzying number of consumer goods -- post revenue in the fourth quarter of $12.47 billion, up 15% from the Rohm-less $10.85 billion of the corresponding 2008 period. Without the acquisition, Dow revenue still grew year-over-year, albeit by a much narrower 4%.
-- Written by Scott Eden in New York
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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.