Dow enters its third-quarter report with an awkward contradiction. Last quarter delivered the company's strongest results in a year, with operating EBITDA more than doubling from the prior quarter's $873 million to $2.3 billion and beating management's own guidance. Yet the stock has fallen 10.4% since then while the S&P 500 gained 5.2%. The market appears to be treating the second quarter as a geopolitical windfall rather than a turning point, and the October 22 report, due before the open, is Dow's chance to argue otherwise.
The Street expects earnings of $0.65 per share on revenue of about $11.25 billion. Against last year's loss of $0.19 a share, that is a dramatic swing, and revenue growth of 12.8% would confirm that pricing gains have held. Sequentially, though, the picture is a retreat: second-quarter EPS was $1.44 on $12.09 billion in sales. That decline is roughly what management told investors to expect when it guided third-quarter EBITDA to about $1.7 billion. The Earnings Whisper of $0.74 sits meaningfully above consensus, suggesting the more engaged crowd believes management's repeated description of that guide as conservative.
The main reason for the step-down is polyethylene. A $0.15 per pound price settlement in North America in June was expected to flow through the third quarter, and management embedded roughly a 10-cent decline in global integrated margins. The key question is whether the 5-cent price increase Dow announced has stuck, and whether Middle East supply disruptions and Strait of Hormuz logistics constraints have kept customers paying a premium for supply security. If pricing held firmer than feared, the Packaging and Specialty Plastics segment, which fell short of its raised interim outlook last quarter, could deliver the upside the whisper implies. If feedstock costs for oil, naphtha and benzene rose faster than selling prices, downstream margins would face pressure from both directions.
Self-help should be the most predictable part of the quarter, which makes any slippage costly. Management raised its full-year benefit target to more than $1.3 billion from about $1.1 billion, and lifted the Transform to Outperform program to roughly $700 million. The second half was supposed to show the payoff: about $60 million from shutting the Barry, UK siloxanes plant, around $50 million from the site transformation playbook, and more than $200 million from headcount reductions that were about 55% complete. The Performance Materials and Coatings segment, which reported lower operating EBIT year over year on higher costs and the Barry closure, is the obvious place to look for evidence that these actions are reaching the income statement. The data center coolant business and the restarted Terneuzen 3 cracker are smaller but useful signs of whether new growth and lower-cost capacity are adding to results.
Sentiment has cooled, moving to 10.7% bearish from 1.5% bearish ahead of the last report. The chart tells a similar story. At $28.51, the shares sit well below the 200-day moving average of $32.14 and near the bottom of their post-earnings range of $26.61 to $33.40. The previous quarter's range reached as high as $41.48, so much of the optimism from the Middle East supply shock has already disappeared. Low expectations can help a stock react well, but only if management gives investors a reason to look past the current quarter.
That reason probably needs to come from the fourth-quarter outlook as well as the third-quarter numbers. Management has said deleveraging is now its first capital priority, after debt rose about $1 billion over the past year, and the unresolved Sedara restructuring still hangs over the balance sheet. The core question is whether Dow can show that the gains from pricing and cost cuts remain intact without help from a geopolitical disruption. EBITDA comfortably above $1.7 billion, self-help tracking ahead of plan, and a steady outlook would support the new CEO's more confident tone. A result that merely matches the guide would leave the market's skepticism unchallenged.