The Dow Chemical Company (NYSE:DOW), the world's second-largest chemical producer by revenue, is expected to report a 5.4 percent profit increase for the first quarter of 2013 as its shift toward stable businesses of specialty chemicals and low-cost raw materials offset its cyclical businesses of basic chemicals and plastic additives.
The Midland, Mich.-based chemical giant will likely report net income of $755 million, or 61 cents per share, compared with $714 million, or a fractionally lower 61 cents per share, in the year-earlier period, according to a survey of 20 analysts by Thomson Reuters. Dow's revenue is expected to rise slightly by 1.1 percent to $14.88 billion, just above the $14.72 billion it reported in the first quarter of last year.
Dow will release its first-quarter earnings Thursday morning before markets open.
During the first quarter the company continued shifting its portfolio to more specialized and less cyclical chemicals and continued expanding into agricultural products and raw materials. Specialty chemical lines have higher margins and are less cyclical than commodity plastics businesses, according to Bret Jensen, chief investment strategist for Simplified Asset Management, who says Dow now gets 60 percent of its revenues from specialty chemicals.
The clearest signal of that strategy was the announcement of a huge $20 billion partnership with Saudi Aramco to build a massive specialty chemicals complex in Saudi Arabia.
Besides focusing on specialty chemicals, Dow is boosting operations based on U.S. natural gas.
"The company is benefiting from low natural gas prices in the United States, which is a key feedstock in myriad Dow products," Jensen said. He added that Dow's plan to build more plants on the U.S. Gulf Coast is a strategy to leverage natural gas prices, which are considerably lower in the U.S. compared with other developed economies, where prices are as much as five times higher.
"Dow Chemical continues its drive forward on the company's two main strategic objectives," said Jeffrey Stafford, an equity analyst with Morningstar, in a research note, regarding the company's push to tilt its portfolio mix more toward specialty chemicals, as well as its drive to secure low-cost raw materials around the globe for its refined and higher-margin products. "We think both of these goals push Dow in the right direction, as [advantages] in the chemical industry are generally built on specialty products and lowest-cost inputs."
Dow's strategy is not without risks. The demand for chemicals and materials is strongly dependent on healthy macro-economic conditions such as GDP and industrial growth, according to a Trefis analysis. Hydrocarbon prices are highly volatile due to their dependence on various macroeconomic and political factors, and any sudden fluctuations can lead to major changes in the margins.
Likewise, Stafford believes the company is vulnerable to volatile end markets such as construction, which is experiencing a weak and uneven recovery in the U.S.
Dow announced plans in March to build a chemical plant on the Gulf Coast and also to sell non-core business lines throughout 2013. This involved accelerating a planned $1.5 billion sale of its plastic additives business and its polypropylene licensing and catalysts business. Jeremy Glaser, markets editor for Morningstar.com, said the move came as the firm tried to rationalize its business and realize $2.5 billion in cost savings.
Another March acquisition was of solar cell producer NuvoSun.
Malik Singleton covers manufacturing and other economic news. His previous roles were with City Limits, TIME.com, Black Enterprise and PCMag.com. He is an adjunct at CUNY's...