Dow Chemical Co. reported a 6 percent increase in third-quarter profits Thursday due to substantial price hikes, but the nation's largest chemical company said a global recession is likely to last through most of next year.
"The global economy is now feeling the full effects of the same economic issues that have plagued the U.S. for the past several quarters," said Chairman and Chief Executive Andrew N. Liveris. "These issues have now been exacerbated by the lack of credit, resulting in a drop in demand not only in the U.S., but around the world.
"In our view, we will likely see a global recession through most of 2009."
Although Dow is well positioned to ride out a global economic slowdown because it has cut costs and preserved cash, its more highly leveraged competitors "are not going to make it," Liveris said during a teleconference with industry analysts.
Adjusted for one-time items such as hurricane-damage expenses, Dow beat Wall Street profit estimates.
Midland-based Dow reported earnings of $428 million, or 46 cents per share, in the three months that ended Sept. 30, up from $403 million, or 42 cents per share, a year ago.
Excluding cleanup and repairs at Gulf Coast operations from Hurricanes Gustav and Ike, research and development costs and acquisition-related expenses, its profit was 60 cents per share.
Analysts polled by Thomson Reuters expected, on average, earnings of 57 cents per share. Analyst estimates typically exclude one-time items.
Shares jumped more than 10 percent, or $2.32, to close at $24.43.
"We continue to believe that Dow is undervalued," Hassan Ahmed, an analyst for HSBC Securities, wrote in a note to investors. Still, citing the global economic situation, he lowered the stock's 12-month target price from $55 per share to $40 per share.
Liveris told analysts that he believes the stock is "undervalued by a long mile."
Dow announced on June 1 that it was implementing across-the-board price increases of 20 percent, then one month later, said it would raise prices again, this time by as much as 25 percent.
That appeared to have cushioned Dow from soaring costs.
Sales rose 13 percent to $15.4 billion, edging estimates averaging $15.6 billion. Its Agricultural Sciences division set a new third-quarter sales record of $976 million, a 24 percent jump.
"Dow performed well in the third quarter despite a difficult economy and increased costs," Liveris said in a written statement. "Our ability to take proactive measures, including the implementation of two broad-based price increases and aggressive cost controls, allowed us to post solid results against worsening market conditions, record-high raw material costs and two hurricanes on the U.S. Gulf Coast."
Costs for raw materials and energy surged 48 percent, or $2.6 billion more than the same quarter in 2007. It was the largest year-over-year increase in company history and the third consecutive quarter in which these costs hit record highs, Dow said.
The company has taken a number of measures to create and save cash, said Geoffery E. Merszei, executive vice president and chief financial officer. It has divested nine businesses this year and plans to reduce capital spending by $100 million, to $2.1 billion, by the end of 2008.
For the first nine months of the year, Dow earned $2.1 billion, or $2.26 per share, compared with $2.4 billion, or $2.49 per share, during the same period last year.
Dow reaffirmed that it was moving forward on two recently announced initiatives: a joint venture with Petrochemical Industries Co., a subsidiary of state-owned Kuwait Petroleum Corp., and its $15 billion acquisition of competitor Rohm and Haas Co.
The joint venture is expected to close by the end of this year and the acquisition during early 2009, Merszei said.
___
On the Net:
http://www.dow.com
