Shares of Dow Inc. (DOW – Free Dow Stock Report) were down slightly after the diversified chemicals company reported first-quarter results. Recall that on April 1st, via a tax-free spinoff to its shareholders, DowDuPont (DWDP) separated its chemicals and polymers business into an independent publicly traded company. DWDP shareholders received one share of Dow for every three shares of DWDP owned. The new Dow Inc. now trades on the New York Stock Exchange under the ticker DOW. It also replaced DowDuPont as a component of the Dow Jones Industrial Average.
Turning to first-quarter financials, it was apparent that the company ran into some headwinds. Net sales decreased 10% from a year-earlier (on a pro-forma basis), to $10.8 billion. This was slightly below our forecast, which was $11.0 billion, but in line with guidance. Packaging & Specialty Plastics was the weak link, with net sales down 15% from a year earlier, though Industrial Intermediates & Infrastructure suffered an 8% decline in net sales. The metric was only down 2% at Performance Materials & Coatings. Volumes were actually up at the latter two divisions, but this was partially offset by a decline in Packaging & Specialty Plastics, which was hurt by lower sales of hydrocarbons and energy co-products. Meantime, the company saw local price declines of 9%, with dips in all segments save for Performance Materials & Coatings, which was flat. Again, lower hydrocarbon co-products played a role, compounded by polyethylene and isocyanates. Unfavorable currency movements hurt the top line to the tune of 2%.
In terms of profitability, margins were compressed in monoethylene glycol and polyethylene at the Kuwait joint ventures and isocyanates at the Sadara joint venture. Year-over-year cost synergy savings clocked in at $125 million in the first quarter. All told, equity losses were $10 million versus $208 million a year earlier.
Looking ahead, management guided to second-quarter revenues in the $11.0 billion-$11.5 billion range, a bit below our previous call of an even $12 billion. The period is apt to see a mix of headwinds (seasonal planned turnaround and maintenance activity) and tailwinds (normalization of inventory levels; increased seasonal demand; strength in consumer care, packaging, and infrastructure sectors; and ongoing cost synergies).
All told, it was a bit of a bumpy start for Dow as a stand-alone entity, though there were some positives, including greater demand in differentiated silicones, polyurethane systems, and packaging. Investors were clearly not overly concerned, judging by the stock's muted reaction to the report. While it will take a bit more time to see what Dow truly looks like in its new form, the lofty dividend yield will certainly pique the interests of income-oriented accounts.
— Matthew E. Spencer
