The commodity chemical company Dow reported better-than-expected second-quarter numbers, but the shares fell as profit dropped from a year ago and as investors continue to worry about the global economy.
Thursday morning, Dow (ticker: DOW) reported earnings per share of $2.31 and an operating profit of $2.4 billion from $15.6 billion in sales. Wall Street was looking for EPS of $2.15 and an operating profit of $2.2 billion from sales of $15.6 billion.
A year ago, in the second quarter of 2021, Dow reported EPS and operating profit of $2.72 and $2.8 billion, respectively, from sales of $13.9 billion.
Sales grew year over year, but sales don’t matter all that much for chemical companies. Revenues are linked to prices for energy, such as oil, which are up. The spread between the prices of the products companies sell and the cost of the feedstock needed to produce them is what investors focus on.
Dow has built a lot of flexibility into its assets. It can switch between oil and gas as a feedstock depending on price relationships. That is one of the ways it continues to earn more than expected.
Still, the stock was down about 2.1% at $51.43 in premarket trading, while futures on the S&P 500 and Dow Jones Industrial Average futures were both off about 0.2%. The year-over-year drop in earnings might be what is concerning investors, though it isn’t necessarily a sign of economic weakness.
Volatile energy prices and lockdowns in China to fight Covid-19 affected the results. Citigroup analyst P.J. Juvekar called the quarter solid, predicting the stock will be fine on Thursday.
He still has his worries, though. “Slowing economies around the world and likely much higher winter energy prices in Europe remain concerns,” Juvekar said in his Thursday report.
Juvekar rates Dow stock at Hold. His price target is $60 a share.
Free cash flow continues to impress. Dow generated $1.9 billion in the quarter, while Wall Street was projecting closer to $1 billion. The company returned $1.3 billion to shareholders via $800 million in share buybacks and about $500 million in dividends. The dividend yield on Dow shares sits at about 5.3%.
In addition to earnings, Dow also announced a trio of recycling projects. Dow is trying to reduce the amount of plastic waste its business generates by, essentially, reinserting plastics into the front end of its processes. One of Dow’s partners, Mura Technology, for instance, turns plastic back into the chemicals and oil from which they came. Dow buys that reformulated feedstock from Mura, which replaces some of the oil and natural gas Dow buys.
That looks like a smart move in the long run. Over the near term, Dow will have to manage through the energy-price volatility Juvekar highlighted in his report. Analysts and investors will also be watching for signs that demand is slowing amid high inflation and rising interest rates.
Coming into Thursday trading, Dow stock is down about 8%.
Write to Al Root at firstname.lastname@example.org