With shares of The Dow Chemical Company (NYSE:DOW) trading at around $32.30, is DOW an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Dow Chemical is getting slammed after reporting Q4 results. The stock closed down 6.96 percent today. Q4 EPS came in at -$0.61, which missed expectations and is a big drop from -$0.02 for the same quarter last year. Dow Chemical took charges of $990 million for the quarter. Without restructuring and impairment charges, EPS is $0.33. Q4 revenue came in at $13.92, which beat expectations. Gross margin was 14.2 percent, which was an improvement of 160 basis points year-over-year. Operating margin was 4.7 percent, which was an improvement of 110 basis points year-over-year. Net margin was -4.5 percent, which was a 500 basis point decline year-over-year.
FY2012 EPS came in at $0.70, which is a 65 percent drop compared to last year. Excluding one-time items, EPS is $1.90, but that would still be short of 2011 EPS, which was $2.05. FY2012 revenue came in at $56.80 billion, which is also weaker than 2011. Q1 estimates are $0.65 EPS and $14.79 billion in revenue. FY2013 estimates are $2.42 EPS and $58.99 billion in revenue.
Dow Chemical is in the midst of a cost-cutting program worth $2.5 billion. At least 2,400 jobs will be cut, and at least 20 plants will be shut.
Let’s take a look at some more important numbers prior to forming an opinion on the stock.
E = Equity to Debt Ratio Is Normal
The debt-to-equity ratio for Dow Chemical is normal. It’s stronger than the debt-to-equity ratios for E.I. du Pont de Nemours and Company (NYSE:DD) and Eastman Chemical (NYSE:EMN). The balance sheets for all three companies are weak.
T = Technicals on the Stock Chart Are Mixed
Down Chemical has displayed a respectable performance over the past three years. However, recent trends have shown weakness in the stock.
At $32.30, Dow Chemical is currently trading above all its averages.
E = Earnings Have Been Inconsistent
Earnings and revenue had been improving from 2009 to 2011, but those trends came to a halt in 2012.
We already know what happened this quarter. Now let’s take a look at previous quarters.
T = Trends Might Support the Industry
In an overall sense, there is weakness in Europe and China. In Europe, building and construction sales remain under pressure due to lower volume. Weakness in Europe shouldn’t come as a surprise. Weakness in China is concerning. Sales have also been down in the United States. The only place where sales are up is in Latin America, and there only notched a slight increase.
The following segments of the business are strong right now: Agricultural Sciences, Performance Plastics, Electronic & Functional Materials, Coatings. The following segments of the business are weak right now: Feedstocks, Energy Performance.
Positives include good valuation, a 3.70 percent yield, a good cost savings plan, strong cash flow, and management that is focused on shareholders. In a macro sense, this is a strong and profitable business. However, at the moment, economic conditions don’t favor the company. One big threat is if the stock market corrects. Dow Chemical doesn’t hold up well in these types of environments. On the other hand, you can’t underestimate the power of a company that looks out for its shareholders.
In this case, the positives and negatives cancel each other out. Dow Chemical is a WAIT AND SEE.
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