Dow Jones Earnings Show the Recovery Is Real

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Chemical giant Dow reported third-quarter earnings Thursday morning. The numbers were better than analysts expected, showing that the global economic recovery continues at a good pace.

The Dow gained 50 cents per share, above the 33 cents Wall Street was looking for and above where management expected quarterly earnings to arrive. Sales were also better than expected, but sales are usually less relevant for commodity chemical companies because commodity prices, as well as input costs, move with commodity prices.

Volumes rose around 9% sequentially as companies improved in a weak second quarter. “Anything that touches consumers, that’s from a demand standpoint,” Dow Chief Financial Officer Howard Ungerleider tells Barron. But he said durable goods, such as automobiles and home appliances, are still low around about 10% of previous peaks.

Overall, product volumes decreased by about 1% year over year. In addition, China’s recovery is ahead of the rest of the world: “China is back,” Ungerleider added. Dow volume growth in China was about 8%, about twice the overall economic growth. That’s a similar relationship to historical patterns for chemical demand before the Covid-induced recession.

That’s good news for all investors, as well as investors in the Dow. “The recovery is happening, but it is going to be uneven, it is not the same in all markets,” says the CFO.

For Dow specifically, free cash flow in the quarter was $ 1.5 billion, and Dow has paid off about alrededor 1.8 billion in debt during 2020. Cost and cash management seems to be sound.

Dow shares still yield around 5.8%. Chemical components of the S & P 500 produce about 2%, although LyondellBasell (LYB) chemicals produce about 5.5%.

However, despite strong earnings, cash flow and dividend yield, Dow shares have fallen about 11% year to date, worse than comparable returns for the Dow Jones Industrial Average and S&P 500.

The stock might deserve a better fate, but sometimes investors avoid chemical companies because they are hard to understand. Investors don’t always want to delve into exactly what isocyanates are or why uretans are complicated, for example. Hard-to-understand supply problems can cause surprises in profits or disappointments, and investors hate uncertainty.

Shares are up 2% in pre-market trading on Thursday after the strong profit impression. Management hosts a conference call for analysts and investors at 8 a.m. Eastern Time.

 


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