- After the dreadful second quarter marred by an over 24% revenue decline, the Q3 brought some sense of relief, as revenues were down by only 9.8%.
- Given the pressure on margins amid pricing headwinds stemming from the soft demand, Dow failed to turn the quarterly GAAP profit again.
- Anyway, its 9M FCF reached $3.64 billion, easily covering the dividends paid.
- In the bullish scenario, two of Dow’s segments can deliver single-digit sequential revenue growth in Q4.
- I maintain the bullish rating.
Dow Inc. (DOW), the global chemical industry behemoth, has recently wrapped the third quarter of choppy 2020. The company beat the Wall Street adjusted EPS and revenue estimates, delivering the top-line result of $9.71 billion, which was above its own guidance, and the non-GAAP profit per share of $0.5, thus shrugging off the skepticism of bears who question the pace of the economic recovery in the U.S. and across the globe. The beat was also impressive considering that in gloomy Q2, even despite pundits trimming their EPS expectations a few times, the company failed to deliver adjusted profit in-line with forecasts.
Since my previous article on DOW published in July, the stock has been on a tear, delivering a ~15.8% (dividends are not of secondary importance in the case of this player) and thus trouncing the S&P 500 which returned only ~7.3%.
For a broader context, still, its performance year-to-date is much weaker if compared to the U.S. market benchmark, while the Materials Select Sector SPDR ETF (XLB) has also been much stronger given its substantial exposure to the industrial gas companies, which have been market-darlings this year given bumper demand for medical oxygen.
After the Q3 earnings presentation, I remain bullish. I also believe the dividend thesis is valid. Let me elaborate on why.
Delving deeper into the report
After the dreadful second quarter marred by an over 24% revenue decline, the Q3 brought some sense of relief. Revenues were down by only 9.8%; the essential variable that precipitated the consolidated revenue decline was weak local prices, while volumes were not that distressed as they fell by only 1% vs. 3Q19 (page 1). However, Dow reported that sequential improvement vs. the June quarter was 16%, which illustrates that the economy has already passed its very bottom. So, it appears that the hypothesis of the Dow CEO who expected “a gradual and uneven recovery” was entirely correct.
Now let us take a deeper look at the segmental results:
