Dow Chemical's quarterly profits top expectations

Houston • Dow Chemical Co., the largest U.S. chemical maker, posted second-quarter earnings that exceeded analysts' estimates as the company expanded margins by raising product prices and cutting expenses.

Profit excluding some items was 74 cents a share, the Midland, Mich.-based company said Wednesday, exceeding the 71-cent average estimate of 17 analysts compiled by Bloomberg.

Second-quarter net income fell to $882 million, or 73 cents a share, compared with $2.34 billion, or $1.87, a year earlier, the company said.

Earnings before interest, taxes, depreciation and amortization climbed to 15 percent of sales, up from a margin of 14.6 percent a year earlier. Ebitda climbed at four units, with small declines in agriculture and feedstocks.

Revenue gained 2.3 percent to $14.9 billion, topping the $14.8 billion average estimate. Prices rose 2 percent on average while sales volumes expanded 1 percent, with revenue up across all six of Dow's business units. The shares rose 1.9 percent before the start of regular trading in New York.

Chairman and Chief Executive Andrew Liveris is expanding chemical output in the U.S. and Saudi Arabia while also trying to sell underperforming units. His strategy of integrating commodity chemicals with higher-value downstream businesses such as auto plastics has been criticized by activist investor Third Point, which said in January that the company should be broken up.

Third Point, founded and led by Daniel Loeb, said in a May letter to investors that Liveris should "embrace" Dow's position as one of the biggest commodity chemical businesses, instead of pursuing a strategy that reduces earnings by $2.5 billion a year.

"Dow is on a mission to prove they can add more value than Third Point suggests," John Roberts, a New York-based analyst at UBS Securities, said by phone Tuesday.

Chemical margins expanded as price gains outpaced costs for raw materials such as ethane, which is used to produce ethylene and downstream products such as plastics, said Hassan Ahmed, a New York-based analyst at Alembic Global Advisors.

"The main surprise through the course of the quarter came in the form of lower natural gas and ethane prices" compared with the start of the year, Ahmed, who recommends buying Dow shares, said in a July 14 note.

Liveris said Wednesday in an interview on CNBC that talks with New York-based Third Point have been ongoing and that there are "no sacred cows" at Dow, citing the planned sale of the company's 117-year-old chlorine business.

Back in March, Liveris had defended Dow's integrated strategy, saying it saves as much as $2.5 billion in Ebitda annually.

In May, Third Point applauded some moves made by Dow since the hedge fund's concerns became public knowledge, including an increase in the company's dividend, $4.5 billion of planned share buybacks and expanding a program to sell underperforming assets.

Sadara, Dow's joint venture with Saudi Arabian Oil Co., is under construction with the first units to start in late 2015, Dow said in March. A propylene dehydrogenation unit in Freeport, Texas, is slated to begin operating next year, with an ethylene unit at the same site scheduled to start in 2017.