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Dow Does Price Hikes


Chemical company looks to pass rising costs onto customers.


Think you pay a lot for stuff like food, automotive products or construction supplies right now? Hold onto your wallets, folks; things may be getting even more expensive. Per CNBC:

Citing a sharp rise in the costs of energy, raw materials and transportation, Dow will raise prices globally on its broad slate of products that range from plastics and films to paints and agricultural supplies from June 1st (Increases of up to 20% are expected). The article goes on to say that "Dow's move came as little surprise to industry watchers, since prices for natural gas, a key feedstock for the chemical industry, have jumped by 56 percent since the end of 2007, and crude oil prices have rallied 32 percent to more than $125 per barrel.

This news begs three very important questions:

First, will other chemical companies follow suit? There are no guarantees. But for what it's worth, reports that "DuPont said it likely will implement 'average range' price increases this year as well, based on 'raw material and energy cost escalation.'" The piece also quoted a spokesperson with German chemical company BASF as saying, "given the market that we're in, it wouldn't be unreasonable to expect more price increases."

In short, if Dow (DOW) is successful at passing along such price increases, these other companies could take a more broad-based (as opposed to a targeted) approach as well. After all, why wouldn't they?

They'd find themselves in good company. According to Bloomberg, Monsanto (MON), Hershey (HSY), General Mills (GIS) and Avery Dennison (AVY) are among 11 companies in the Standard & Poor's 500 Index that increased their so-called LIFO reserve, a move that captures rising inventory costs by at least 20 percent over the past four quarters.

LIFO is an acronym for the "last in, first out" method of accounting. This means that the most recently acquired materials are the basis for the cost of the goods these companies sell. Bloomberg notes that companies typically get rid of their older items first in the "first in, first out," or FIFO principle. The LIFO reserve, therefore, is an illustration of their rising costs.

The second big question is whether Dow's customers will swallow such dramatic increases or push back. That's hard to gauge at this point, although I fail to see what other alternative it has. Why, you ask?

Yahoo Finance shows Dow's gross margins over the trailing 12 months lagging those of Dupont (13.03% versus 29.71%). Ditto on the operating margin line. Over the same period, Yahoo Finance indicates that Dow's operating margin stood at 7.01% versus 13.61% at Dupont.

Like it or not, DuPont (DD) is considered to be a comparable. It seems Dow needs to do something to goose its margins, bring additional dough to the bottom line and make the company and stock more attractive to the investment community.

It's equally important to note that the CNBC missive quotes the company as saying that "its cost of energy and feedstocks surged 42 percent in the first quarter from a year earlier." That's a big jump. So again, what choice does the company have apart from price hikes?

The final question is: Will a roughly 20% price increase be the cure-all for the company - or the industry for that matter?

Again, that's hard to gauge with an real precision. But at the same time I think it's telling that insiders at Dow and DuPont haven't placed any big bets with their own money recently. In fact, over the past six months, they've been pretty quiet at Dow. With the exception of one sizable purchase (of 25,200 shares by John Hess, a director), the data indicates that nobody else has been buying shares. Activity at DuPont has been similarly sparse.

My point: If insiders at either company thought that prospects going forward were great, wouldn't they pick up a few token shares? After all, both stocks are off their 52-week highs.

Shares of Dow were up almost 1.5%, or 60 cents, on the day. The stock was up 25 cents, or just over half a percent, in after hours trading.

No positions in stocks mentioned.

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