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What Could Drive Up Dow Chemical’s Operating Earnings per Share?

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Analysts’ expectations for Dow Chemical’s operating EPS

As of April 18, 2017, Wall Street analysts expect Dow Chemical (DOW) to post operating EPS (earnings per share) of $0.98 in 1Q17 compared to $0.89 in 1Q16, an increase of 10.1% on a YoY (year-over-year) basis.

The expected increase in operating earnings per share could be primarily driven by the synergy effect of the continued integration of the DOW-Corning (GLW) business. As a result, analysts are expecting the selling, general, and administrative (or SG&A) expenses to fall drastically from $1.1 billion in 1Q16 to $773.1 million in 1Q17. As a percentage of sales, DOW’s SG&A expenses represented 10.3% of its revenue, while its 1Q17 SG&A expenses are expected to make up 6.2% of its revenue, a decrease of four percentage points year-over-year.

Share repurchases

Another major way that a company can increase its EPS is by reducing its outstanding shares. DOW resumed its share repurchase program in July 2016 after the merger with DuPont (DD) was announced. In 4Q16, DOW purchased approximately 9.3 million shares. However, on December 30, 2016, DOW converted all of its preference shares into ordinary shares.

Investors can indirectly hold Dow Chemical by investing in the First Trust Indxx Global Agriculture ETF (FTAG), which holds 9.5% of its portfolio in Dow Chemical. Other major holdings of this fund include Syngenta (SYT), which had a weight of 4.6% on April 20, 2017.

In the next part, we’ll look into analysts’ recommendations and target prices for Dow Chemical ahead of its 1Q17 earnings release.

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