Monday, August 28, 2006

A Dow Q & A

Q. Would you please comment on Dow Chemical Co.? We've been pleased with this holding but the stock has experienced some recent volatility.

A. The world's second-largest chemical company, behind Germany's BASF AG, is cinching its belt tighter these days. It has chosen strict discipline, cost controls and cash management as solutions to earnings disappointments that stem from rising expenses in oil, natural gas and feedstocks.

Dow Chemical shares (DOW) are down 15 percent this year following last year's 11 percent decline and a 19 percent gain in 2004.

Recent quarterly earnings were down 19 percent from a year ago, which had a gain from one-time items. Andrew Liveris, the firm's chairman and chief executive, predicted a "difficult year."

Nonetheless, several company insiders, including Livris, considered the price drop an opportunity and bought shares recently.

The company remains aggressive overseas, where it derives more than half of its revenues. In China it is investing $200 million to expand its epoxy business, whose products are used in coatings and laminates. It bought a Chinese water treatment plant to create Dow Water Solutions, which deals with water purification.

In Russia it formed a joint venture with Russian polyurethane specialist Izolan to make materials used in such products as car seat cushions and athletic shoes. In Saudi Arabia it is negotiating a joint venture with Saudi Arabian Oil Co. to run a chemicals and plastics project there.

As the results of its hard-line approach to efficiency are awaited, the consensus analyst rating on Dow Chemical stock is midway between "buy" and "hold," according to Thomson Financial.

Commodity products such as plastics and chemicals represent 40 percent of Dow Chemical sales, specialty products 40 percent and agriculture and other products 20 percent. To its credit, the company has been able to increase its sales to automakers and their suppliers despite that industry's problems.

Earnings are expected to decline 3 percent this year and 4 percent next year. In comparison, the major diversified chemicals industry is expected to post 8 percent gains in both years.

The five-year annualized return is projected to be 8 percent versus 9 percent for its peers.

Among concerns, the firm still has significant asbestos liabilities, and not all are covered by insurance. In addition, the Environmental Protection Agency made a preliminary finding of violations at Dow Chemical's Midland, Mich., plant, in which the plant exceeded permitted emissions and also didn't file the proper forms.

The firm was also one of three chemical manufacturers ordered to pay Modesto, Calif., a combined $178 million for contaminating its water. Dow Chemical said it will challenge the verdict.

The above Hartford Courant story didn't get into the Dow retiree from Baton Rouge charged with trying to sell trade secrets to the Red Chinese.

Nevertheless, I'm really enjoying the new Dow commercials on TV.

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