First quarter earnings were strong, but a fly is still stuck in the ointment of this company's agricultural chemicals division, which, according to MoneyShow's Jim Jubak, is bad news for shares of fertilizer and other farm sector companies still to report.
A good day yesterday, April 23, for earnings at Dow Chemical (DOW). The company reported first quarter earnings of 84 cents a share, 8 cents a share better than projected by Wall Street analysts. (The news on revenue wasn't nearly so good, with revenue falling 14.5% from the first quarter of 20014 and missing the $13.04 billion consensus by $67 million.) The company continued its restructuring in the quarter by selling off another low-margin business-disposing of its chlorine business to Olin (OLN) for $5 billion—so that it can focus on higher margin units such as its seed and agricultural chemicals business.
But to the degree there was a caterpillar in the corncob this quarter, it came in that agricultural chemicals business. Which is bad news for shares of fertilizer and other farm sector companies still to report. Dow's results argue that investors looking for a turnaround in the farm and farm commodity sector will need to wait a little longer.
Timing is critical right now for several unrelated sectors that have been hit and hit again by the collapse in oil prices, by falling prices for farm commodities, and by plunges in the prices of iron ore, copper, and gold. These sectors won't move precisely in lockstep, although they do share an exposure to the speed of economic growth in China. It's tempting at a time when indexes seem to set new records everyday to say that the turn in these damaged groups is just around the corner. But the results from Dow Chemical—call it an indicator stock—say that for the farm sector, it's still too early.
In its earnings presentation, Dow Chemical made it very clear where the one problem was this quarter. Dow Automotive, Dow Electronic Materials, Dow Energy and Water Solutions, Dow Polyurethanes, Dow Packaging, and Dow Specialty Plastics all set records for operating EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). For the company as a whole, operating EBITDA margins rose by 2.84 percentage points to the highest level since 2005. (This all means very healthy cash flow at Dow Chemical. The stock yields 3.29%.)
The story was very different in the agricultural division. There, what Dow Chemical characterized as weak commodity prices, resulted in a 12% year over year decline in sales and a 19% drop in EBITDA. Sales of seeds and crop protection chemicals (herbicides and pesticides) fell, in line with results in the rest of its industry, in most regions of the world except for the Asia Pacific. In North America, commodity prices softened and levels of inventory in the sales channel were high. In Latin America, slowing economic growth, in general, presented significant headwinds. (The strong dollar didn't help any of these results either.)
In its guidance for the remainder of the first half, Dow Chemical was relatively pessimistic for this part of its business. Earnings would be flat to down in comparison to the first half of 2014.
Dow Chemical's results in its agricultural chemicals division mirror the miss that Monsanto delivered with its April 7 earnings report. Monsanto also pinned the blame for disappointing results in its seeds and farm chemical business on lower commodity prices and a resulting decline in acres planted to corn.
The big North American fertilizer producers don't report until the end of April. Potash of Saskatchewan (POT) and Mosaic (MOS) report on April 30 and Agrium (AGU) reports on May 5. On the evidence from Dow Chemicals, we won't see a turn in the sector in those reports—or in guidance—but watch carefully.
