The Zacks Chemicals Diversified industry is grappling with raw material cost inflation as well as higher supply chain and logistics costs. Semiconductor shortage hurting the automotive sector and the rapid spread of the Delta variant are the other concerns, which may impact demand for chemicals. The industry is also bearing the brunt of hefty trade tariffs.
Industry players like Dow Inc. (DOW – Free Report) , Olin Corporation (OLN – Free Report) , The Chemours Company (CC – Free Report) and Avient Corporation (AVNT – Free Report) are banking on strategic measures, including operating cost reductions to tide over the challenging environment.
About the Industry
The Zacks Chemicals Diversified industry consists of manufacturers of basic chemicals, plastics, specialty chemicals and agricultural chemicals. Companies in this space serve a host of end markets such as automotive, building & construction, transportation, electronics, aerospace and agriculture. Basic chemicals are produced in large quantities, and include petrochemicals and intermediates (such as ethylene, propylene and benzene), polymers (including plastic resins such as polyethylene, polypropylene and polyvinyl chloride) and inorganic chemicals (such as chlorine, caustic soda and titanium dioxide). Specialty chemicals that include catalysts, specialty polymers and coating additives are used in specific fields based on their performance. Agricultural chemicals include herbicides, fungicides and insecticides that are used to protect crops from disease, pests and weeds.
What’s Shaping the Future of the Chemicals Diversified Industry?
Higher Input Costs Pose Margin Headwinds: The industry players are exposed to cost pressure associated with raw materials resulting from short supply due to coronavirus and weather-related events. These companies also face challenges arising from higher supply chain and logistics costs. The disruption in the supply chain has pushed up the prices of inputs. The devastating winter storm in the U.S. Gulf Coast also disrupted the supply of feedstocks. The lingering impacts of supply chain and logistic bottlenecks, exacerbated by the recent unfavorable weather events globally and the resurgence of coronavirus infections, are expected to continue over the short term. Shutdowns associated with Hurricane Ida may further squeeze the supply of raw materials. Higher raw material prices are, thus, likely to hurt the margins of diversified chemical companies over the short term.
Demand Worries From Delta, Chip Crunch: Companies in the chemical diversified space benefited from a recovery in demand across certain major industries during the first half of 2021. However, the rapid spread of the highly contagious Delta variant of coronavirus may impact business activities and lead to a slowdown in demand over the near term. Although the automotive industry has rebounded from coronavirus-led shutdowns, demand in the space is unlikely to return to the pre-pandemic levels anytime soon. The semiconductor shortage is affecting automotive production, which may create a short-term demand headwind. The disruptions are hurting automotive builds around the world, causing a slowdown in chemical demand in this major market.
Trade Tariffs Remain a Concern: Hefty trade tariffs remain a drag on the industry. The United States and China have imposed billions of dollars in punitive tariffs on each others’ products. China’s tariffs on American products include a wide swath of chemical products. While the completion of the preliminary trade deal averted the implementation of a new round of tariffs on chemicals, the steep tariffs currently in place are already doing damage to the industry. China is among the biggest export markets for U.S. chemicals. Beijing’s tariffs are hurting U.S. chemical exports.
Strategic Actions to Drive Results: The companies in this space including prominent names such as Dow, DuPont de Nemours, Inc. (DD – Free Report) and LyondellBasell Industries N.V. (LYB – Free Report) are taking a host of strategic measures including cost-cutting and productivity improvement, operational efficiency improvement and actions to strengthen the balance sheet and boost cash flows. In particular, the industry participants are aggressively implementing actions to lower costs, including a reduction in discretionary spending and traveling expenses. Some of the industry players such as Air Products and Chemicals, Inc. (APD – Free Report) , Eastman Chemical Company (EMN – Free Report) , PPG Industries, Inc. (PPG – Free Report) , FMC Corp (FMC – Free Report) and Albemarle Corp (ALB – Free Report) are aggressively raising selling prices to counter the raw material cost inflation. These moves are likely to help the industry in sustaining margins amid the pandemic-induced challenges.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #191, which places it at the bottom 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Chemicals Diversified industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 22.8% over this period compared with the S&P 500’s rise of 35.4% and the broader sector’s growth of 26.2%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing chemical stocks, the industry is currently trading at 10.47X, below the S&P 500’s 16.25X and above the sector’s 8.23X.
Over the past five years, the industry has traded as high as 13.12X, as low as 5.19X and at the median of 7.80, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 Chemicals Diversified Stocks to Keep a Close Eye on
Avient: Ohio-based Avient offers specialized and sustainable material solutions. Its products include specialty engineered materials, advanced composites, and color & additive systems. The company is likely to benefit from improved demand conditions across its end markets, strength in its composite technologies and synergies of the acquisition of Clariant Masterbatch. Strong demand in consumer applications is expected to contribute to its performance. The buyout of Magna Colours also expands its portfolio of sustainable solutions.
The company currently has a Zacks Rank #1 (Strong Buy). It has expected earnings growth of 75.1% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 6.7% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 10.3%. The stock has also rallied around 76% over the past year.
Price and Consensus: AVNT
Dow: Based in Michigan, Dow is a material science company, providing a world-class portfolio of advanced, sustainable and leading-edge products. It is benefiting from cost synergy savings and productivity initiatives along with its investment in high-return projects. The company focuses on maintaining cost and operational discipline. Its restructuring program is also expected to deliver margin benefits. The company also remains committed to investing in attractive areas through highly accretive projects. It is also benefiting from higher demand for its materials across healthcare and packaging markets, and a recovery across construction, automotive and appliances end markets.
The company currently carries a Zacks Rank #2 (Buy). It has expected earnings growth of 403% for the current year. The consensus estimate for current-year earnings has been revised 17.9% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 25.6%. Moreover, its shares have gained around 26% over a year.
Price and Consensus: DOW
Olin: Based in Missouri, Olin is a vertically integrated global producer and distributor of chemical products, carrying a Zacks Rank #2. The company should benefit from its actions to improve its cost structure and efficiency and drive productivity through a number of projects. It is also expected to gain from cost and other benefits from its investment in the IT project. The Lake City U.S. Army ammunition contract should also drive sales and profitability of its Winchester segment.
The company has expected earnings growth of 630.4% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 35.6% upward over the last 60 days. The company’s shares have also surged around 321% over the past year.
Price and Consensus: OLN
Chemours: Based in Delaware, Chemours is a leading provider of performance chemicals. Chemours, carrying a Zacks Rank #2, is benefiting from a rebound in demand from the coronavirus-led downturn, strong execution and its cost-cutting actions. It is witnessing the increasing adoption of the Opteon platform. Demand for Opteon remains strong in mobile and stationary applications. The company’s cost-reduction program along with its productivity and operational improvement actions across its businesses are also expected to support margins.
Chemours has expected earnings growth of 86.4% for the current year. The consensus estimate for earnings for the current year has been revised 17.9% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 38.9%. The stock has also rallied around 58% over the past year.