Dow Earnings Preview: Organic Growth Likely To Be Flat, Focus To Remain On DuPont Merger

Dow Chemical (NYSE: DOW) is set to report its Q3’16 earnings result on Thursday, October 27th. In light of challenging commodities market, the company is concentrating on delivering value through margin improvement. The company had reported 160 bps improvement in its operating EBITDA margins. Soft raw material prices have been the main driver of profitability. For Q3’16 we expect the company to report low-single digit growth in its organic revenue (excluding acquisition & divestitures) on account of decent results in performance plastics, consumer solutions and infrastructure solution segments.

Mild Growth In Performance Plastics Segment, Agriculture Science To Remain Subdued

For Q3’16 we expect the company to report low single-digit growth in its Performance Plastics segment on a year-over-year basis. We also expect margin improvement for the segment on two counts – low crude oil prices (the feed stock of plastics) and gross-margin expansion resulting from better pricing for polyethylene. However, Agriculture Science segment continues to face headwinds due to continued weakness in farm income. We expect the company to post a decline in organic revenue for the Agriculture Science division for Q3’16 on a year-over-year basis, mainly because of low volumes of crop-protection products. The uptick in the corn market in North and Latin America will help in countering this decline to some extent.

Furthermore, the company completed the acquisition of all the remaining shares in its joint venture, Dow Corning. It expects to generate a gain of about $500 million in cost and revenue synergies at full run rate. Dow can use its expansive network to drive volumes for Dow-Corning’s silicone products. The products are also high margin and should help improve the bottom line going forward. For Q3’16 we expect EBITDA expansion by about $200 million due this transaction.

A Word On Dow DuPont Merger

Dow Chemicals and DuPont impending merger is under the intense scrutiny of regulators globally (Read: Dissecting Dow-DuPont Deal: Concern Over Concentration). The merger was expected to be completed in H2’16 but is facing opposition from farmers’ communities globally. Given the situation as it stands now, we expect the management to postpone the timeline to H1’17.

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