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4 Stocks to Buy From the Promising Diversified Chemical Industry

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·8 min read
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The Zacks Chemicals Diversified industry has recovered after reeling under the effects of the coronavirus fallout. A strong revival in demand in major end markets from the pandemic-led lows and an upturn in manufacturing and industrial activities globally have put the wind back in the sails of the industry.

Dow Inc. DOW, Albemarle Corporation ALB, Huntsman Corporation HUN and The Chemours Company CC are well placed to benefit from the rebound in demand. Strategic measures, including reduction of operating costs, are also helping these companies to navigate a still-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?

Strong End-Market Demand Buoy Prospects: Lockdowns and restrictions by governments around the world, in response to the pandemic, halted industrial activities through the first half of 2020 and gutted demand for chemicals in the key end-use markets, including automotive, construction and electronics. However, chemical demand started to pick up from the third quarter of 2020 on the return of global economic activities. The uptick in demand is being driven by a rebound in manufacturing and industrial activities globally. The automotive industry has rebounded, following the virus-led slump riding on pent-up demand and the shift toward private transportation. Despite the semiconductor crunch still hurting production, diversified chemical companies are seeing firm demand from the automotive market. The construction sector has also bounced back on the resumption of many projects, with strength particularly being witnessed in residential construction. A recovery in demand is also being witnessed across the aerospace and energy markets. An upturn in drilling activities on the back of a surge in oil prices has led to an uptick in demand in the energy space. As the major end-use markets gain further strength, demand for chemicals is expected to go up, thereby driving sales volumes and top lines of diversified chemical companies.

Strategic Actions to Drive Results: The companies in this space 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 bring down costs, which include the reduction of discretionary spending and traveling expenses. The industry players are also raising selling prices to counter cost inflation. These moves are likely to help the industry in sustaining margins amid the prevailing challenges.

Higher Input Costs Pose Margin Headwinds: The industry players are exposed to cost pressure associated with raw materials resulting from short supply. These companies also face challenges arising from higher supply chain and logistics costs. The pandemic-driven disruptions in the supply chain have pushed up the prices of inputs. Russia's invasion of Ukraine and new government-mandated lockdowns in China have also put more pressure on the already strained global supply chain. The impacts of supply and logistic bottlenecks are expected to continue over the short term. Higher raw material and logistics costs are, thus, likely to drag the margins of diversified chemical companies.

Zacks Industry Rank Indicates Upbeat Prospects

The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #97, which places it at the top 38% 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 a bright near term. 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 S&P 500

The Zacks Chemicals Diversified industry has underperformed the Zacks S&P 500 composite over the past year while outperforming the broader Zacks Basic Materials sector over the same period.

The industry has lost 8.1% over this period compared with the S&P 500’s decline of 6.1% and the broader sector’s decline of 11.3%.

 

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 6.63X, below the S&P 500’s 12.38X and above the sector’s 5.97X.

Over the past five years, the industry has traded as high as 13.28X, as low as 5.27X and at the median of 8.03, 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

Albemarle: North Carolina-based Albemarle is a premier specialty chemicals company with leading positions in attractive end markets globally. It is benefiting from higher volumes in its lithium business on continued recovery in global economic activities. Healthy customer orders and plant productivity improvements are supporting volumes. Higher lithium prices due to tight market conditions are also supporting its performance. Its bromine business is also gaining from higher demand, a rebound in certain end markets, higher pricing and cost-saving actions. ALB is seeing strong demand for flame retardants. The company is also strategically executing its projects aimed at boosting its global lithium derivative capacity. It remains focused on investing in high-return projects to drive productivity. Albemarle is also benefiting from cost-saving and productivity initiatives.

Albemarle, currently sporting a Zacks Rank #1 (Strong Buy), has expected earnings growth of 175% for the current year. The Zacks Consensus Estimate for ALB’s current-year earnings has been revised 85.8% 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 22.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Price and Consensus: ALB

 

 

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. DOW also remains committed to investing in attractive areas through highly accretive projects. It is also benefiting from higher demand for its materials across a number of markets, including personal care, electronics, construction, healthcare and packaging.

Dow currently carries a Zacks Rank #2 (Buy). The consensus estimate for current-year earnings has been revised 18.8% upward over the last 60 days. DOW has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 9.2%.

Price and Consensus: DOW

 

 

Huntsman: Texas-based Huntsman is a leading manufacturer of differentiated and commodity chemical products. Huntsman remains focused on growing its downstream specialty and formulation businesses. The company's Polyurethanes segment is well positioned for strong upside in the long term on the back of its focus on ramping up its high-value differentiated downstream portfolio. HUN should also gain from significant synergies of acquisitions. Its strong liquidity and balance sheet leverage gives it adequate flexibility to continue to develop and expand its core businesses through acquisitions and internal investments.

Huntsman, carrying a Zacks Rank #2, has an expected earnings growth rate of 22.6% for the current year. The consensus estimate for HUN's current-year earnings has been revised 8.5% upward over the last 60 days. The company beat the Zacks Consensus Estimate for earnings in each of the last four quarters at an average of 12.6%.

 

Price and Consensus: HUN

 

 

Chemours: Based in Delaware, Chemours is a leading provider of performance chemicals. Chemours is benefiting from a rebound in demand from the coronavirus-led downturn, strong execution and its cost-cutting actions. It is witnessing increasing adoption of the Opteon platform. Demand for Opteon remains strong in mobile and stationary applications. CC’s cost-reduction program along with its productivity and operational improvement actions across its businesses are also expected to support margins.

Chemours, a Zacks Rank #2 stock, has expected earnings growth of 30.5% for the current year. The Zacks Consensus Estimate for earnings for the current year has been revised 15.2% upward over the last 60 days. CC beat the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 28.7%.

 

Price and Consensus: CC

 




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