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Dow’s Performance Plastic Segment Is Set to Soar on Expansion

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Feb. 2 2017, Updated 7:36 a.m. ET

Performance Plastic segment’s performance

Dow Chemical’s (DOW) Performance Plastic segment reported revenue of $4.8 billion in 4Q16, a rise of 4.8% year-over-year (or YoY) compared to $4.6 billion in 4Q15.

The Performance Plastic segment accounted for 37.2% of DOW’s total revenue, compared to 40.2% in 4Q15, representing a fall of 3.0% YoY.

DOW’s Performance Plastic segment reported an operating EBITDA (earnings before interest, tax, depreciation, and amortization) of $1.1 billion in 4Q16, a fall of 12.3% YoY compared to $1.3 billion in 4Q15. The Performance Plastic segment’s operating EBITDA margin fell to 24% in 4Q16, compared to 28% in 4Q15, representing an EBITDA margin contraction of 400 basis points.

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Driving factors

DOW’s Performance Plastic segment’s revenue growth was driven by double-digit volume growth in Asia, North America, and the EMEAI (Europe, the Middle East, Africa, and India) region due to the continued commercial ramp-up of the Sadara facility, a joint venture between Dow Chemical and Saudi Aramco. During 4Q16, the segment’s revenue was impacted by planned maintenance activity, which affected its sales by $100 million.

The segment’s EBITDA margin fell due to a rise in feedstock and energy costs along with the above-mentioned planned maintenance activity. Equity earnings for the segment were reported to be $54 million in 4Q16, compared to $46 million in 4Q15, primarily due to the Sadara commercial ramp-up.

Segment’s outlook

The Performance Plastic segment is poised for higher revenue growth with the continuing commercial ramp-up of Sadara. During 4Q16, two capacity expansions were completed. The first was a polyethylene facility in Seadrift, Texas, and the second, in Lousiana, increased the company’s ethylene capacity by more than 200,000 tons per year. With these two expansions, DOW’s long-term growth looks intact.

Investors can indirectly hold Dow Chemical by investing in the Materials Select Sector SPDR ETF (XLB), which had invested 11.9% of its portfolio in Dow Chemical as of January 27, 2017. The other top holdings of the fund include DuPont (DD), Monsanto (MON), and Praxair (PX) with weights of 11.7%, 8.3%, and 5.9%, respectively, as of January 27, 2017.

In the next article, we’ll look into analysts’ recommendations for DOW following its 4Q16 results.

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