Dow Chemical struggles to hold up earnings

Your Money

August 27, 2006|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Would you please comment on Dow Chemical Co.? We've been pleased with this holding but the stock has experienced some recent volatility.

-E.P., Mount Dora, Fla.

The world's second-largest chemical company, behind Germany's BASF AG, is cinching its belt tighter these days. It has chosen strict discipline, cost controls and cash management as solutions to earnings disappointments that stem from rising expenses in oil, natural gas and feedstock.

Dow Chemical shares (DOW) are down 16 percent this year after last year's 11 percent decline and a 19 percent gain in 2004. Recent quarterly earnings were down 19 percent from a year ago, which had a gain from one-time items. Andrew Liveris, the firm's chairman and chief executive, predicted a "difficult year."

Nonetheless, several company insiders, including Liveris, considered the price drop an opportunity and bought shares recently.

The company remains aggressive overseas, where it derives more than half its revenues. In China it is investing $200 million to expand its epoxy business, whose products are used in coatings and laminates. It bought a Chinese water treatment plant to create Dow Water Solutions, which deals with water purification.

In Russia it formed a joint venture with Russian polyurethane specialist Izolan to make materials used in such products as car seat cushions and athletic shoes. In Saudi Arabia it is negotiating a joint venture with Saudi Arabian Oil Co. to run a chemicals and plastics project there.

As the results of its hard-line approach to efficiency are awaited, the consensus analyst rating on Dow Chemical stock is midway between "buy" and "hold," according to Thomson Financial. That consists of four "strong buys," two "buys" and 10 "holds."

Commodity products such as plastics and chemicals represent 40 percent of Dow Chemical sales, specialty products 40 percent and agriculture and other products 20 percent. To its credit, the company has been able to increase its sales to automakers and their suppliers despite that industry's problems.

Earnings are expected to decline 3 percent this year and 4 percent next year. In comparison, the major diversified chemicals industry is expected to post 8 percent gains in both years. Dow's five-year annualized return is projected to be 8 percent versus 9 percent for its peers.

Among concerns, the firm still has significant asbestos liabilities, and not all are covered by insurance.

The Environmental Protection Agency also made a preliminary finding of violations at Dow Chemical's Midland, Mich., plant. The factory allegedly exceeded permitted emissions and also didn't file the proper forms.

The firm was also one of three chemical manufacturers ordered to pay Modesto, Calif., a combined $178 million for contaminating its water. Dow Chemical said it would challenge the verdict.

Franklin Growth Fund was recommended to me. Is it a worthwhile investment?

-K.T., via the Internet

Talk about staying power: This fund's portfolio manager, Jerry Palmieri, has been in charge more than for four decades.

He holds many stocks in his portfolio for a very long time. He won't invest in any stocks of financial companies, because he believes it would be a conflict of interest since he works for a financial-services firm. From time to time he has also held a lot of cash.

The $2.3 billion Franklin Growth Fund "A" (FKGRX) is up 9 percent over the past 12 months and has a three-year annualized total return of 11 percent. Both results rank in the upper one-third of large growth and value funds.

"This fund has done well recently, but its five- and 10-year returns trail the Standard & Poor's 500," said Dan Culloton, an analyst with Morningstar Inc. in Chicago. "While I think that overall it will beat inflation, I believe there are better options out there, and I'm not confident that this fund will do better than other alternatives."

Palmieri's stock selections have generally been better than his decisions on asset allocation. While Franklin Growth Fund did well in the 1987 market crash, it under performed in the late 1990s by keeping too much money in cash and jumped back into the market too soon in 2002.

It is not as growth-oriented as its name implies. The fund can buy stocks of any size, but Palmieri generally prefers industry leaders, and that approach tends to emphasize large-cap stocks. It has become more volatile as Palmieri has held less cash recently.

Industrial materials and health care represent one-third and one-fourth of the portfolio, respectively. Other significant categories are business services and technology hardware. Top holdings recently were Boeing, Genentech, General Dynamics, 3M, Northrop Grumman, Amgen, Johnson & Johnson, Apple Computer, Yahoo and United Technologies.

This 5.75 percent "load" (sales charge) fund requires a $1,000 minimum initial investment. Its annual expense ratio of 0.94 percent is below average for its category, but has increased in recent years.

How often should I update my estate plan and will?

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