Pricing power returns to U.S. chemical makers
Fri Jan 28, 2005 04:57 PM ET
By David Brinkerhoff
NEW YORK, Jan 28 (Reuters) - U.S. chemical makers are enjoying plenty of leverage to raise prices on everything from bleaching agents to piping plastics these days, which promises to turn a neat profit in 2005 for companies and investors alike.
Dow Chemical Co. and DuPont Co., the two biggest U.S. chemical makers, posted stronger-than-expected earnings this week on the back of surging demand. With plants running flat out and productivity rising, some industry watchers see chemical producers entering a cycle of robust pricing and profits not seen since 1995, the last peak for the industry.
"Dow offers a high-quality way to play the emerging petrochemicals cycle, along with an approximately 3 percent dividend yield," said Frank Mitsch, analyst with Fulcrum Global Partners, who rates the stock a buy.
Shares for Dow have been on the rise since the middle of 2003, when the company first reported signs of a turnaround after cutting jobs and aggressively increasing prices.
"We look at Dow favorably," said Gene Pisasale, senior investment officer at Wilmington Trust Co., whose firm manages $26 billion in assets, including Dow shares.
"They've followed through on promises to cut costs and put through price increases in their product lines, and they've exceeded that and more than earned their dividend," he said. He maintains a hold on Dow and rival DuPont.
Strong prices and volumes for key products like chloralkali -- for bleaching and plastics -- and polyethylene, the bellwether chemical used in most U.S. plastics and secondary chemicals -- lead Fulcrum's Mitsch to surmise that Midland, Michigan, Dow, is in the part of the cycle where earnings increases and upside surprises are becoming prevalent.
Mitsch on Friday raised his 2005 earnings estimate for Dow to $4.25 from $3.90 a share and initiated a 2006 forecast of $5.50, which may be too "conservative," he said.
Fourth-quarter prices jumped 28 percent for Dow and 4 percent for DuPont because of strong demand and high costs for oil, natural gas and other materials used to make their products.
"Worldwide pricing is rebounding, clearly," Wilmington's Pisasale said. "Volumes have been growing for the last several quarters and now you're starting to see pricing power."
Higher volumes usually foreshadow price increases because it is a sign that plants are running flat out and supplies are skin tight, allowing producers to charge customers more.
Rising prices, especially in times of high energy costs, help chemical producers hold or expand profit margins.
DuPont's Chief Financial Officer, Gary Pfeiffer, said the 4-percent rise in selling prices last quarter and the 3-percent gain for the year highlighted "the strongest ... gains that we have seen in 15 years," due to robust demand and launch of 800 new products, many of which carry a premium price compared to older lines.
Dow's stock traded around $30 in July of 2003, when the company announced the beginnings of a turnaround that has driven shares up 70 percent to around $50.
DuPont's gains are not as impressive yet, rising from around $40 in July 2003 to around $47 on Friday, an 18 percent gain over the same period.
Pisasale said the smaller gains for DuPont versus Dow are typical since their mix of products includes fewer basic commodities, which are the first to benefit from rebounding demand.
A survey of Dow analysts shows 6 rate the stock as a "buy" while 6 give it a "hold" rating and 3 an "outperform," according to Reuters Estimates. DuPont shows 6 "buys," 3 "outperforms" and 3 "holds."
As rising prices for basic chemicals get passed on to companies making more niche products, like DuPont, they in turn start charging more.
"Now you're going to see that pricing power transfer to the downstream companies," Pisasale said. "You should see pricing power with DuPont and Rohm and Haas Co. with the next several quarters."
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