Why Was Dow Chemical Company’s Stock Up Last Week?

Dow Chemical Company‘s (NYSE:DOW) stock gained more than 5% following its Q4  2016 earnings announcement. In part, this increased investor confidence can be attributed to Dow rekindling the belief that its proposed merger with DuPont will go through despite European Union’s scrutiny. The other factors that contributed to stock price increase include Dow Chemical beating consensus estimates for the fourth quarter, and its results reflecting the growth in demand for its products. There was also some evidence that the price decline across the industry has eased off a little bit. This is especially important considering that Dow Chemical Company’s business has been reeling under the pricing pressure arising from intense competition in the chemical industry. The company’s revenue declined by nearly 6% in the first nine months of the year, with average prices falling nearly 9%. However, in the fourth quarter, Dow’s sales grew 3% excluding the impact of acquisitions, with growth visible across all operating segments except infrastructure solutions. Sales volume was also up 3%, suggesting that the average pricing remained more or less flat.

Although there is much to be happy about, investors should remain cautious. Despite Dow’s reassurance, its proposed merger with DuPont remains uncertain. Additionally, the company expects its margins to take a hit in Q1 2017 due to the expenses related to the ongoing merger efforts. While the demand for seeds helped support the overall pricing for Dow’s products, crop protection prices continue to suffer.

Our price estimate of $60.50 for Dow Chemicals is roughly in-line with the market.

Here are some of the positive outcomes of Dow’s fourth quarter earnings:

First, Dow’s focus on consumer markets seems to be paying off. Excluding the impact of acquisitions, the company saw volume growth of 7% in consumer solutions, 5% in agricultural science and 4% in performance plastics in the fourth quarter of 2016. Higher volume growth will equip the company better in its fight against price competition.

Second, performance plastics is Dow Chemical’s biggest segment and accounted for more than 35% of its fourth quarter revenue. This segment saw revenue growth of more than 4%, with sales volume increasing by a similar percentage. This suggests that the average prices of performance plastics products did not fall. This is a good news for Dow.

Third, other key segments including performance materials and chemicals, and agricultural sciences, also saw some growth. While the demand for corn seeds is growing in North America and Latin America, EMEA and Latin America continue to see a surge in volume of crop protection products as well. Overall, the pricing increased by 2%, which is a solid sign for Dow considering how the company performed in the first half of the year. This price increase can be attributed to higher demand for corn seeds.

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