Chemical Earnings

The first batch of second-quarter earnings reports from major U.S. chemical companies confirms that industry growth, seen for more than a year, is continuing unabated. Of the 13 companies that have reported second-quarter earnings from continuing operations, excluding one-time items, only two, Engelhard and Sigma-Aldrich, had earnings increases of less than 10%.

More important was the distribution of double-digit or better increases among the companies. Until late 2004, downstream specialties companies were having trouble overcoming escalation in raw material costs, which held down earnings growth. For the past couple of quarters, though, they seem to be catching up.

For instance, Rohm and Haas posted a 51.7% second-quarter earnings increase to $179 million on an 11.4% rise in sales to $2.01 billion. The company's profit margin rose to 8.9% from just 6.6% in the second quarter of last year. CEO Raj L. Gupta says, "Our performance reflects the ongoing emphasis on implementing price increases to recover extraordinarily high raw-material and energy costs, while maintaining tight control over our expenses."

Lubrizol had the largest percentage increase in second-quarter earnings--105.8% to $63.8 million on a 48.0% jump in sales to $1.07 billion. These comparisons, however, include the results from the company's acquisition of Noveon for only one month of the corresponding 2004 quarter.

Upstream, industry leader Dow Chemical continued its string of high quarterly growth rates with an earnings jump of 75.4% to $1.17 billion on just a 16.3% sales increase to $11.5 billion.

Number two DuPont provided perhaps the biggest news among chemical companies last week when the firm reported that earnings rose just 12.3% to $904 million on a 0.2% decline in sales to $7.51 billion, and it lowered its earnings forecast for the year.

The company's results translated to earnings of 90 cents per share, while analysts had expected 96 cents. As a result, at least two stock analysts--Donald D. Carson at Merrill Lynch and Frank J. Mitsch at Fulcrum Global Partners--cut their ratings on the company from buy to neutral. "Although we believe that DuPont offers shareholders long-term value at current levels," Mitsch wrote, "the disappointing earnings along with the below-consensus near-term outlook, with ancillary litigation issues hanging overhead, will most likely restrain the stock from outperforming near term."