Dow Chemical cuts back

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The US stock market has rallied hard for two straight days, buoyed by hopes that the incoming president intends to spend his way out of the recession with an Eisenhower-esque binge on infrastructure. Yet a steady trickle of bad news continues to emerge from the industrial economy. In the past week Chrysler, DuPont, and diversified manufacturer 3M have all announced job cuts. Dow Chemical on Monday joined in, painting a bleak picture for demand.

As the largest producer of several basic industrial chemicals, Dow is exposed to all corners of the global economy. When chief executive Andrew Liveris announced that the group would leave idle 30 per cent of its manufacturing capacity, he reported that only food, agriculture and healthcare had held up in the face of the downturn. Mr Liveris also intends to cut 5,000 full-time jobs (about 11 per cent of the total), and trim the contractor workforce by a further 6,000. By 2010, he aims to have slashed $700m from the cost base.

That is bad enough. But Dow will shortly have to stump up $15.3bn in cash to buy speciality chemicals maker Rohm & Haas – a deal that looked expensive back in July when the takeover was announced. Still, combined with a commitment not to cut the dividend, the moves were sufficient to prompt a 7 per cent rally in the shares.

Indeed, yielding 8 per cent, Dow looks cheap. Those cost savings represent a 25 per cent boost to net earnings. The range of analyst estimates for 2009 earnings runs from $1.40 to $3.40 a share – four times the size of the cost savings per share. Yet it is worth remembering that the restructuring plan is required because the future remains so uncertain.

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