Earnings reports from companies engaged in producing commodity chemicals, such as Dow Inc (ticker: DOW), serve as valuable indicators of the overall economy. Unfortunately, the latest report suggests that the long-awaited economic recovery is still out of reach.
In their Tuesday morning release, Dow announced adjusted earnings per share (EPS) of 75 cents, generated from sales totaling $11.7 billion. These figures surpassed the market’s expectations of 70 cents and $11.2 billion, respectively. For comparison, in the second quarter of 2022, Dow posted EPS of $2.31 and sales of $15.7 billion.
The decline in sales and earnings can be attributed to falling energy prices and a sluggish economy, resulting in narrower margins for commodity chemical producers. Year over year, unit volumes shipped experienced an 8% decrease. Nevertheless, these results are quite commendable when accounting for market expectations.
According to CEO Jim Fitterling, “We proactively navigated the challenging near-term macro environment by implementing our targeted cost savings actions while capitalizing on our advantaged feedstock position and participation in attractive end-markets.” Fitterling expressed optimism regarding these actions but acknowledged that the outlook remains uncertain. He stated, “Looking ahead, we will continue to execute our near-term cost savings actions and advance our longer-term strategic priorities as we manage through a macro environment that is expected to remain challenging in the second half of the year.”
Dow does not provide complete financial guidance for a quarter but offers “modeling guidance” for analysts. As per their estimations, third-quarter earnings are expected to be similar to those of the second quarter—slightly worse than what Wall Street currently predicts.
Dow Inc Expects Gradual Recovery in the Global Industrial Slowdown
Dow Inc’s CFO, Howard Ungerleider, shares some optimistic insights on the current state of the global industrial slowdown. While acknowledging the challenging conditions, Ungerleider believes that Dow has reached the bottom and is positioned for a gradual recovery. Dow, known for being an early indicator of slowdowns, had already highlighted inventory destocking concerns towards the end of 2022. However, Ungerleider now indicates that this destocking phase is nearing completion, providing a glimmer of hope for the year ahead.
Despite this positive outlook, Dow Inc’s shares experienced a minor decline of 0.9% during early trading on Tuesday. In contrast, S&P 500 futures saw a modest increase of 0.1%, while Dow Jones Industrial Average futures remained unchanged.
Over the past 52 weeks, Dow Inc stock has registered a modest 2% gain. In comparison, the S&P 500 has seen a much stronger increase of approximately 15% over the same period. The company’s stock performance has been impacted by the prevailing economic conditions. However, it has been supported by a respectable dividend yield of 5.3%.
During the first half of 2023, Dow Inc generated approximately $900 million in free cash flow. Dividend payments accounted for around $1 billion during this period. While there is a $100 million gap between cash flow and dividend payouts, reflecting the challenging economy, Ungerleider reassures that it is not a major cause for concern. Over the past three years, Dow has consistently achieved an average free cash flow of about $5.4 billion annually. It is projected that free cash flow for 2023 will be approximately $2.5 billion.
Management will be hosting a conference call at 8 a.m. Eastern time to discuss these results further. Investors eagerly await any insights about the potential timing and pace of the economic recovery.
