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The chemicals giant Dow had good news both for shareholders and for market watchers in general. Earnings were higher than expected, and while overall growth was slow, sales volumes are increasing in China, which is good news for the economy.
The stock was up 4.8% in early trading, compared with a marginal gain in the Dow Jones Industrial Average.
Dow (ticker: DOW) reported 91 cents in per-share earnings, better than the 72 cents analysts predicted. The volume of chemicals sold fell 2% on a reported basis, but underlying trends are better than the headline numbers suggest.
“You get less co-product credits when you crack [natural gas],” CFO Howard Ungerleider tells Barron’s. “When you factor that in volumes grew about 1%.”
Chemical companies are complicated. Product prices are based on energy prices, so declining revenues reflect falling oil prices and not necessarily weak underlying demand. And chemical companies can make products using natural gas or oil derivatives as raw materials, adjusting the mix based on the profitability of each feedstock.
Less extra “stuff” comes from lighter, natural-gas based, production, making volume comparisons difficult. Ungerleider believes Dow’s feedstock flexibility is a competitive advantage.
“Our results this quarter demonstrated the Dow team’s focus on managing operational levers in response to a difficult business environment,” said CEO Jim Fitterling in the company’s news release. “We grew volume in our packaging, polyurethanes and silicones businesses, and once again successfully leveraged our industry-leading feedstock flexibility in the U.S. and Europe.”
Chinese sales volumes grew by “double digits,” according to Ungerleider, who said that China is “not getting worse.” Stable demand in China is good news not only for Dow, but for any industrial company.
Dow recently completed its separation from DowDuPont—now renamed DuPont de Nemours (DD)—and Ungerleider says the company has focused on cost reduction and cash flow as a stand-alone entity. “We removed another $200 million in stranded costs this quarter. Cash flow improved $500 million year over year,” he said.
Still, shares have fallen about 5%, worse than the 4% comparable gain of the Dow Jones Industrial Average over the same span. It’s difficult to blame the company. Reported earnings have exceeded Wall Street’s estimates in all three quarters so far in 2019.
Write to Al Root at allen.root@dowjones.com