Commentary: Investors must cut back chemical profit expectations on 'slow-growth and volatile' environment

26 October 2012 08:41  [Source: ICB]

The global chemical sector was splashed with a cold dose of reality in the form of the earnings releases of US-based producers Dow Chemical and DuPont. Both have a substantial presence worldwide, with the majority of sales outside their home country.

Given the poor results and management guidance, investors will be forced to reset their expectations for the fourth quarter and the start of 2013.

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Dow posted earnings per share of $0.42, down by 32% from the year ago period, but ahead of consensus of $0.37/share. Sales fell 7% year on year on an adjusted basis on 2% higher volumes and 9% lower prices.

"We recognise that these difficult conditions may have extended staying power, as the new reality is that we are operating in a slow-growth and volatile world," said CEO Andrew Liveris. Yet investors were encouraged by the company's restructuring plan, sending its shares up 4.7%, on 24 October.

Dow will take bold actions to combat headwinds, including the closure of around 20 plants and the elimination of 2,400 jobs (5% of the workforce) to save about $500m/year (€386m/year) by the end of 2014. It will also slash capital expenditure from 2011 levels of $2.69bn by $100m in 2012, and another $700m in 2013, and halt $200m in new business growth spending.

However, major petrochemical projects such as its Sadara joint venture with Saudi Aramco and its US Gulf Coast investments will proceed as planned. DuPont saw third-quarter underlying earnings per share decline by 47% to $0.32, far off consensus of $0.46/share.

Sales were down 9% with volumes off 5% and prices up 1%. Volume declines were pronounced in the Asia-Pacific region (minus 10%). Weakness was driven by its titanium dioxide (TiO2) and electronics businesses.

Its stock plunged over 9% on the results on 23 October. The firm will also cut 1,500 jobs in the next 12 to 18 months as part of a plan to cut $450m/year in costs.

DuPont also guided to an extremely weak fourth quarter, with earnings per share in the $0.030.08 range versus $0.35/share in the fourth quarter of 2011.

JP Morgan analyst Jeffrey Zekauskas said earnings "will have challenges to growth in 2013 and are likely to be substantially below our previous forecasts given the severity of falling TiO2 prices, weakness in the solar area, and surprisingly little resilience in DuPont's construction-related operations".

Zekauskas cut his 2013 projection from $4.50/share to $3.55/share.

By: Joseph Chang
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