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In the case of the current market environment, the cost-cutting phenomenon was only permitted for a quarter. That's what makes the latest round of earnings reports from the chemical sector somewhat disappointing. Sure, the likes of Dow Chemical (NYSE:DOW), DuPont (NYSE:DD) and Eastman Chemical (NYSE:EMN) have all reported nice profits, but in a sequel to the second quarter, the third-quarter beats came on the back of cost-cutting.
So that begs the question: When are chemicals makers going to get their respective acts together and show some top-line growth? Let's look for an answer among the aforementioned trio.
-
Dow Chemical (NYSE:
DOW)
2009 Sales Estimate: $44.6 billion
2010 Estimate: $48.8 billion
- DuPont (NYSE: DD)
2009 Sales Estimate: $25.9 billion
2010 Estimate: $28.1 billion
- Eastman Chemical
(NYSE: EMN)
2009 Sales Estimate: $5.0 billion
2010 Estimate: $5.5 billion
Big Company, Big Cost-Cuts
Dow Chemical is the largest U.S. chemicals company and it has been wielding a seemingly unrelenting ax to its costs to beat profit estimates. In July, the company forecasted an uptick in demand, but ruled out a truly noteworthy recovery for 2009. In the third quarter, Dow earned 63 cents a share on sales of $12.05 billion, beating analyst estimates of 10 cents a share on sales of $11.85 billion. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Still, sales at Dow's three biggest businesses, basic plastics, performance products and performance systems, were all down at least 30% from the year-ago period. Dow cut $380 million in structural costs in the third quarter and sold a stake in a Dutch refinery and its Morton salt business.
Dow shares are up nearly 100% in the past six months, but a run like that can only continue for so long without substantial revenue growth. If the economy is truly rebounding, Dow could grow sales by around 8% in 2010, but double-digit growth might be necessary to extend the stock's bullish run.
More of the Same at DuPont
DuPont is the third-largest U.S. chemicals maker and a member of the Dow Jones Industrial Average. Like Dow Chemical, it has been paring costs at nearly every turn over the past year. In the third quarter, DuPont's sales slid by 18% to $5.96 billion, below analysts' estimates of $6.27 billion. The decline wasn't limited to a particular geography as sales dropped in the U.S., Europe, Africa and the Middle East.
DuPont reduced energy costs by $400 million in the quarter and reduced fixed costs by $300 million; that helped drive a nice beat of profit estimates, but raw materials prices won't fall forever. Fortunately, DuPont is forecasting a rebound in demand as early as the current quarter and the company is aiming for $1 billion in cost reductions this year.
Investors have become accustomed to DuPont's cost-cutting ways as the shares are up a benign 15% in the past six months, and even that performance could be at risk if sales don't rise by at least 8% in 2010.
The Same Old Song With Eastman
Eastman Chemical said third-quarter sales fell by 27%, but profits handily beat Street estimates. The company even said it expects to report fourth-quarter earnings toward the high end of analyst estimates. How is Eastman going to do that? By cutting costs, how else?
Eastman is up about 40% in the past six months, and the stock still trades at just 15 times forward earnings. Yielding 3.2%, Eastman offers an annual payout of $1.76 a share, which is superior to both Dow and DuPont, which might be just enough to keep some investors interested until sales really increase. (To learn about some issues that may complicate dividends for investors, see Dividend Facts You May not Know.)
Bottom Line: More Sales, Please
All three of these stocks have seen some strong gains without rising sales and that's a trend with a finite lifespan. Dow's move into specialty products through its gargantuan acquisition of Rohm & Haas should eventually provide some nice sales growth, making Dow a nice long-term play. Frankly, it might take a while for sales growth to resume at all of these firms, making the chemical group a great place to search for long-term rewards.
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