Five-Past Midnight at The Dow Chemical Company

High raw material costs recently forced Dow Chemical (DOW-$33.92) to move ahead with plans to temporarily idle or reduce production at a number of manufacturing plants. Ethylene commodity-like sales cycle, an economic downturn in the U.S. (about 40 percent of sales), and a second round of price hikes being passed along to its customers—as if the world’s second largest diversified chemical company did not have enough rotting food on its plastic plate, now it has an image problem to digest, too.

I will hold the candle
'til it burns up my arm
oh I'll keep takin' punches
'til their will grows tired
oh I will stare the sun down
until my eyes go blind hey,
I won't change direction
and I won't change my mind

Bhopal Toxic Cloud

In August 1999, Dow paid $11.9 billion to purchase what was left of Union Carbide, best known for the devastating toxic gas leak that occurred in December 1984 at its now closed pesticide plant in the central Indian City of Bhopal. Although the chemical giant had nothing to do with the industrial accident, Bhopal survivors and some people—both in India and abroad—believe Dow should clean up the site, where toxins have leaked into groundwater, and be held accountable for unresolved indictments against Union Carbide and its former executives, according to Manjeet Kripalani, Bureau Chief in India, BusinessWeek magazine.

how much difference does it make
how much difference does it make ~ Alternative Rock group, Pearl Jam ("Indifference" lyrics, 1993) _ You Tube video

In addition, a group of shareholders has complained to the SEC that Dow has failed to disclose that up to $1.0 billion of proposed investments in India are subject to risk, due to its Union Carbide exposure. Sanford Lewis, attorney for the complainant, said on May 14: "Dow has stated repeatedly it has no liability for remediation of the Bhopal site, yet [the] document released by the Indian government tells a different story."

Dow repurchased 10.8 million shares in the first-quarter ended March 31 – the most shares bought back in one quarter in a decade. Unless management is feigning indifference, the $2.5 billion spent on share buybacks of 61 million shares in the past eight quarter suggests the Bhopal legacy is immaterial to forward guidance.

Given the company's solid financials—working capital of $6.7 billion and debt-to-capitalization ratio of 32 percent—and trailing-twelve month cash flow of $4.4 billion, the truth be told is immaterial.

Five-Past Midnight

Image-makers opine the best way for any company to avoid public relations nightmares is to stay ahead of the curve—present the facts, state a plan for correcting the problem, and take responsibility.

"Never Mislead—while you do not have to reveal information that may be harmful, always tell the truth," says Kelly Denny, Director of Public Relations at Brabender Cox. "If you play it loose and fancy free with the truth, you stand to have your key audience find out you lied and lose all faith in you. If you lose credibility, you have lost the battle no matter what the outcome."

Best-selling French author, Dominique Lapierre, Five Past Midnight in Bhopal, a retelling of the Bhopal tragedy, argues that the lessons of Bhopal were never learned.

Charges of hiding the (alleged) health risks of silicone-gel breast implants; claims that the manufacture and use of pesticides containing dibromochloropropane (DBCP) causes personal injury and property damage, including contamination of groundwater; $322 million in accrued obligations for environmental remediation and restoration costs, not withstanding ongoing run-ins with the EPA; alleged anticompetitive behavior in synthetic rubber businesses—Dow Chemical is tenured when it comes to public relation nightmares.

Bisphenol-A Storm Brewing

A U.S. government agency recently acknowledged "some concern" over the common plastic ingredient bisphenol A (BPA)—used to make the polycarbonate and epoxy resins in everything from DVDs to baby bottles. Studies have linked exposure to the chemical —which can rapidly leach out of plastic bottles when they are exposed to a hot liquid—to damage in developing brains and tissues as well as a heightened risk of cancer later in life.

The U.S. government’s National Toxicology Program said in April there is "some concern" about BPA from experiments on rats that linked the chemical to changes in behavior and the brain, early puberty and possibly pre-cancerous changes in the prostate and breast.

As momentum builds to remove BPA from products, The Dow Chemical Company, which is the number two U.S. producer of BPA is battling back. PR wheels spinning, the company counters that the American Chemistry Council (a trade group representing chemical makers) has repeatedly said that "at the levels to which consumers are exposed, BPA base materials do not pose a risk to consumers."

Wal-Mart, the nation’s largest discount retailer, said last month that it is taking steps to remove products that contain BPA from its shelves.

Although the stock of Dow Chemical is drifting near its 52-week low of $33.01 a share—and fetches about 1.5 times book—we believe the depressed price only discounts higher raw material costs and the economic slowdown. The impact of its BPA footprint, potential product withdrawals, and potential litigation could further depress the share price.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.