Wall Street cuts 2Q profit estimates for chem companies

24 June 2005 17:00  [Source: ICIS news]

NEW YORK (CNI)--Despite a smattering of profit warnings in the sector, the North American chemical industry is poised to have a decent second quarter with healthy year-over-year gains in earnings per share (eps).


However, the outlook has suddenly become more uncertain with the re-emergence of $60/bbl oil and natural gas futures pushing $7.70/m Btu. In addition, Wall Street continues to slash profit numbers for commodity chemical companies.


"We think the second quarter is shaping up to be a difficult one for many of the upstream commodity petrochemical producers," said Banc of America Securities analyst Kevin McCarthy. "Everything coming out of the ethylene cracker has weakened sequentially versus the first quarter in North America and perhaps more so in Western Europe. This is putting downward pressure on second and third quarter earnings estimates."


"Pressure is increasing on second quarter earnings because of rising feedstock prices, weak demand in Europe and the falling euro," said Deutsche Bank Securities analyst David Begleiter. "However, there are signs of life in Asia and US demand has held up. Most chemical companies should be able to work through second quarter earnings, but we could see third quarter estimates for a wide range of companies come down unless feedstock costs moderate and/or demand picks up."


On a sequential basis, overall chemical industry earnings performance will likely be mixed. Commodity companies will largely report significantly lower eps in the second quarter versus the first as prices have come down sharply in a number of petrochemical and plastics products.


For example, Lyondell’s second quarter eps is expected to come in at 68 cents - a decline of 38% from the first quarter. Nova is expected to post a 64% decline in eps to 38 cents.


On the other hand, specialty chemical companies will mostly flat-to-higher sequential earnings as they gain pricing power and margin expansion from lower raw material costs. Sequentially, DuPont is expected to post flat profits, while Rohm and Haas’ earnings are expected to rise 6%.


On a year-over-year basis, companies poised to post robust eps gains include Dow with a 73% increase, Eastman 102%, Nova 27%, DuPont 20%, Rohm and Haas 42%, Crompton 400%, Albemarle 26% and Lubrizol 22%.


Lehman Brothers slashes estimates


Lehman Brothers analyst Sergey Vasnetsov, who has been correctly bearish on the commodity chemicals group since March with a "negative" rating, is downgrading Nova Chemicals from "equal weight" to "underweight" and slashing profit estimates across the board for commodity chemical companies.


For Nova, the analyst is cutting his second quarter eps estimate from a profit of 53 cents to a Wall Street-low loss of 36 cents, and halved his full year 2005 forecast from $3.05 to $1.52.


"The second quarter estimate change is mainly due to a negative effect from first-in, first-out accounting [FIFO], and a downward revision to ethylene/polyethylene and European polystyrene," said Vasnetsov.


The analyst is also drastically slashing his 2006 eps estimate for Nova from $5.20 to $2.62.


"Nova’s ethylene/polyethylene segment underperformed Equistar during the most recent ‘hill’ of the ethylene cycle, and we are concerned that the Nova olefins segment contribution to eps at the next hill in late 2005 to early 2006 would be meaningfully lower than previously expected," said Vasnetsov. "We are giving up on the styrenics cycle, due to structural problems which are difficult to cure."


For Lyondell, the analyst is cutting his second quarter estimate from 65 cents to 57 cents and his 2005 forecast from $2.87 to $2.55. On Dow, he maintains his $1.22 estimate for the first quarter, but is trimming his full year 2005 forecast from $4.62 to $4.50.


B of A cuts numbers


Banc of America’s McCarthy recently cut profit estimates on Nova, Westlake, Lyondell, Eastman and Dow to reflect continued weakness in plastic resin prices.


The analyst cut his second quarter estimate for Nova from 77 cents to 52 cents/share, and his 2005 number from $3.80 to $3 on weakness in the styrene and ethylene chains.


McCarthy also slashed estimates on Westlake, taking down his second quarter forecast from 95 cents to 74 cents and his 2005 number from $3.65 to $3.20; and Lyondell, bringing the second quarter down from 80 cents to 63 cents, and the year from $3.10 to $2.75.


More modest cuts were in store for Eastman, where the analyst trimmed his second quarter estimate by 15 cents to $1.79 and his 2005 number by 25 cents to $6.20; and for Dow, where the second quarter estimate came down 2 cents to $1.21 and the year down 20 cents to $4.50.


"Companies that use FIFO accounting such as Georgia Gulf, Nova and Westlake could encounter more severe earnings pressure in the second quarter relative to other companies," McCarthy says. "For these companies, higher cost raw materials are still flowing through the income statement at a time when selling prices are under pressure."


Energy prices surge


One major concern for the overall earnings outlook is the resumed upward surge in oil and natural gas prices. Crude oil has shot up $10 to $60/bbl in recent weeks.


"Over the near term, we think elevated crude oil and natural gas prices could spell more feedstock pain before gain," said McCarthy. "This will result in near-term margin compression before resin producers will have an opportunity to pass those costs downstream later this year when capacity utilization recovers from the sluggish volumes we’ve seen in the second quarter."


Earnings warnings


While the second quarter generally looks to be strong on a year-over-year basis, some companies have announced profit shortfalls.


Most recently, Rohm and Haas announced that unexpected operating issues during planned maintenance activities at its acrylic monomers facility in Deer Park, Texas will result in about $15m in after-tax costs, or 7 cents/share. The company will also write down the value of its synthetic leather and gloss lamination product lines in its adhesives and sealants business to the tune of $16m to $20m.


JPMorgan analyst Jeffrey Zekauskas is trimming his 2005 eps estimate on Rohm and Haas by a nickel to $2.80 versus $2.17 earned in 2004. However, he continues to expect 10% sales growth, gross margin improvement from higher selling prices outpacing raw material costs and lower operating expenses as a percentage of sales.


"The eps shortfall is transitory in our view, and is unlikely to negatively affect the long-term fundamental value of the company," Zekauskas said. "Lower cost absorption in the monomers business stemming from a prolonged maintenance shutdown is likely to be temporary, and we don’t expect additional writedowns to the adhesives asset base related to the leather and gloss lamination products."


On the commodity side, Methanex said it expects to lose about 65,000 tonnes of methanol production in the second quarter because of curtailed natural gas supplies from Argentina to its plant in Chile. This is expected to have a modest negative impact on second quarter results.


Other companies that have warned of upcoming earnings shortfalls include Georgia Gulf, International Flavors & Fragrances, PolyOne and Spartech. On the positive side, ag companies Monsanto and Potash Corp of Saskatchewan have raised their earnings guidance.


While the overall earnings picture could deteriorate in the months ahead, bright spots include inorganic chemicals and specialties.


"Chlorine, caustic soda and soda ash all are maintaining high operating rates and reasonable pricing power in mid-2005," said Banc of America’s McCarthy. "In specialties, we’ve seen evidence of success in raising prices across a number of companies, including the specialty components of Dow and Eastman."


(For additional Chemical Market Reporter analysis, visit the CMR Web site at: http://www.chemicalmarketreporter.com.)

By: Joseph Chang
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