Today’s news:
• Dow Inc. (DOW) reports fourth quarter earnings and revenue beat.
• Marathon Petroleum (MPC) reports a huge fourth quarter earnings beat.
Dow Inc. (DOW – yield 5.7%) reported $0.78 adjusted fourth quarter EPS this morning vs. the $0.74 consensus estimate and $10.20 billion revenue vs. the $10.07 billion estimate. Profits surpassed analysts’ expectations in Dow’s Performance Materials & Coatings (PMC) and Industrial, Intermediates & Infrastructure (III) businesses, and missed expectations in the Packaging & Specialty Plastics (PSP) business. Strong sales volumes in Asia contributed to the quarter’s successes and are expected to continue into the first quarter. Product demand is not expected to be harmed by China’s coronavirus outbreak, since the health and medical industries will likely increase demand for Dow products.
The company produced $1.3 billion of free cash flow during the quarter. Management paid down $1 billion in debt, cut $35 million in costs and repurchased $94 million of stock (and $500 million for the full year).
CEO Jim Fitterling commented, “We experienced similar economic headwinds in the quarter as we have seen all year – especially in the industrial sector – which included price and margin compression, in part driven by additional industry supply and uncertain macros. Yet once again, the Dow team navigated these factors by leveraging our core strengths – feedstock flexibility, a lean cost structure, and leading positions in consumer-driven end-markets. Together, these enabled us to capture demand growth, excluding our Hydrocarbons & Energy business, while also delivering another year-over-year improvement in cash from operations. We also deployed capital to strengthen our financial flexibility and to reward our owners, reducing debt by more than $1 billion and returning more than $600 million to shareholders. We enter 2020 in a stronger competitive and financial position, poised to continue to deliver value for our customers and shareholders.”
Business remains soft due to pricing weakness, though product demand and margins are expected to increase in 2020. Management intends to maintain their focus on cost-cutting, debt repayment and returning cash to shareholders.
Dow Inc. is a commodity chemicals company that derives roughly 50% of profits from its polyethylene business. DOW is an undervalued stock with strong earnings growth and a large dividend yield. In the coming days, analysts will revise their full-year 2020 profit projections, which recently reflected an expectation of 16% growth.
DOW is up over 4% this morning at 49.16. The stock’s median analyst 12-month price target is 57. A minor pullback in the S&P 500 index could easily cause DOW to retest support at 47. Dividend investors should consider DOW shares because the yield is abnormally high right now. Growth investors could accumulate shares, although a bigger rebound could take a while to materialize. Buy.
Marathon Petroleum (MPC – yield 4.3%) reported adjusted fourth quarter EPS of $1.56 vs. the consensus estimate of $0.86, far above all analysts’ estimates. Revenue was $31.4 billion vs. the $33.9 billion estimate. The earnings beat included strong refining and retail fuel margins and higher refining throughput. Speedway retail and midstream operating income were somewhat higher and lower than expected, respectively. Refining operating income was dramatically higher than analysts had forecast.
Profits were additionally impacted by a $1.2 billion charge related to midstream goodwill impairment, $420 million in cost synergies, a higher-than-expected $1.8 billion in capital expenditures and $175 million in biodiesel tax credits. Full-year 2019 cost synergies totaled $1.1 billion, almost double Marathon’s $600 million goal.
Marathon produced $2.4 billion of operating cash flow during the quarter. Management repurchased $121 million of shares in the quarter and $2.0 billion of shares during the full year. As a reminder, Marathon increased their quarterly dividend payout by 9% this week, from 53 cents to 58 cents per share.
Marathon Petroleum is a leading integrated downstream energy company and the nation’s largest energy refiner. Their Speedway retail store spinoff is targeted for early fourth quarter 2020. Management expects to update investors on strategies to optimize their midstream business in the first quarter of 2020. A search for a new CEO is ongoing.
Note that due to the quarter’s big earnings beat, full year 2019 EPS fell 19.5% vs. the expected drop of 32%. If the 2020 consensus earnings estimate does not change, investors can expect 2020 EPS to grow about 44%. However, since refining margins came in dramatically higher than anyone had expected, my guess is that the 2020 earnings estimate will be revised upward.
The share price has weakened in recent weeks, alongside the energy sector, as crude oil prices have come down. The stock is up 1.5% this morning at 53.75. Dividend investors can certainly buy now. The stock is likely establishing price support at 52. Growth investors can buy now, but should not necessarily expect a rapid (or sustained) rebound in the share price. Energy stocks are volatile, and move much more in line with oil prices and swings in the broader market than they do based upon individual companies’ profits and losses. That being said, Marathon Petroleum is expected to have a very successful 2020. Buy.