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The chemical industry -- which had long been out of favor -- is finally getting its groove back. Despite a spate of headwinds, the highly cyclical industry put up a decent performance in 2016, helped by continued strength across automotive and construction markets -- two major end-use markets for chemicals.
The fourth-quarter earnings season had been a good one for chemical stocks. We note that a number of companies in the space including prominent names such as Dow Chemical (DOW - Free Report) , DuPont (DD - Free Report) , PPG Industries (PPG - Free Report) , Celanese (CE - Free Report) and LyondellBasell Industries (LYB - Free Report) came up with better-than-expected earnings in the quarter. The outperformance was partly driven by an improving operating environment and strategic measures including productivity improvement, portfolio restructuring and earnings-accretive acquisitions.
Chemical companies continue to shift their focus on attractive, growth markets in an effort to cut their exposure on other businesses that are grappling with weak demand. The industry is also seeing a pick-up in consolidation activities (exhibited by a wide swath of deals in the recent past) as chemical makers are increasingly looking for cost synergy opportunities and enhanced operational scale in a still-difficult global economic environment.
Moreover, cost-cutting measures (including plant closures and headcount reduction) and productivity improvement actions by chemical companies are expected to yield industry-wide margin improvements.
Notwithstanding some lingering headwinds including concerns over China’s economy and weak demand in the energy space, the industry’s recovery momentum is expected to continue in 2017, supported by continued strength in the light vehicles market, positive trends in the construction space and significant shale-linked capital investment.
The automotive sector continues its healthy run, backed by an improving job market, rising personal income, low fuel prices and attractive financing options. A recovery across housing and commercial construction markets has been another tailwind for the chemical industry.
While the European chemical industry remains stuck in a rut given lower prices, sluggish demand for European chemical exports and weak R&D investments, prospects in the U.S. look bright this year.
U.S. Chemical Industry Set for Solid Growth
The outlook for the U.S. chemical industry paints an encouraging picture. The American chemical industry remains on course for strong growth this year and the next despite several challenges including a strong dollar, soft export markets and a low oil price environment.
The American Chemistry Council (“ACC”), an industry trade group, envisions national chemical production to rise 3.6% in 2017, further accelerating to a 4.8% growth in 2018. Chemical production increased across all regions of the country last year, per the ACC.
The trade group also expects basic chemicals production to expand 4.2% in 2017 on the back of advances in manufacturing and exports. Moreover, production in the specialties chemical segment is expected to pick up pace and rise 3% in 2017.
The ACC also expects American chemical industry’s growth to transcend the nation’s overall economic growth in the long haul. It sees domestic chemical sales to cross the $1 trillion milestone by 2020.
The shale gas boom in the U.S. has also been a huge driving force behind chemical investment on plants and equipment in the country and has provided domestic petrochemicals producers a compelling cost advantage over their global counterparts. The shale revolution has made the U.S. an attractive investment hotspot and incentivized a number of chemical companies including Dow Chemical, BASF (BASFY - Free Report) , LyondellBasell, Eastman Chemical (EMN - Free Report) and Westlake Chemical (WLK - Free Report) to pump in billions of dollars to beef up capacity. The ACC expects domestic chemical industry capital spending to increase at a 7% annual rate through 2021.
EU Chemical Sector in Limbo
The outlook for the European chemical industry looks jaded given a persistently challenging operating environment. Chemical makers in the European Union remain affected by lower prices, a challenging regulatory landscape and competitive disadvantages in terms of costs vis-à-vis the U.S. and Asia.
According to the European Chemical Industry Council (CEFIC), chemical output in the European Union rose by a paltry 0.4% year over year in 2016. Chemical prices fell 3.6% for the year. Lower pricing and modest output growth also hurt chemical sales which slipped 3% during the first eleven months of 2016. CEFIC sees modest growth of roughly 0.5% in chemical output in 2017.
Although the Eurozone economy has gained traction of late, as evident from recent upbeat economic data, it still faces certain near-term risks. The region’s growth prospects, in the short run, are likely to be stymied by political uncertainties caused by Brexit negotiations and elections in major member countries such as Germany and France.
Moreover, concerns about the impact of President Donald Trump's trade policies could hurt sentiment in the region. The European Central Bank has warned that potential protectionist policies under Trump administration could trigger financial instability and hurt EU’s trade with the U.S. as well as global growth.
A Few Lingering Concerns
The chemical industry still remains mired by several headwinds. Chemical makers are still feeling the pinch of depressed demand across agriculture and energy markets. A strong dollar is also hurting U.S. chemical exports, reducing their attractiveness in overseas markets.
Concerns over China’s future growth also remain sources of near-term uncertainties for the chemical industry. Persistent weakness in China -- a key market for chemicals -- is expected to remain as overhang on the chemical industry in the short haul. Sustained overcapacity, weak private investment and high levels of corporate debt are hurting the world’s second-largest economy.
The outlook for the fertilizer and agricultural chemicals space also remains cloudy due to continued weakness in crop commodity prices, low farm income and sluggish economic conditions in certain emerging markets including Latin America.
Valuation Looks Bit Stretched
The Chemicals industry has modestly outperformed the broader market over the past one year. The industry has gained around 13.4% over the same time frame, while the S&P 500 index advanced 12.9%.
Going by the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) multiple, a preferred valuation metric for cyclical industries like chemicals, valuation for the Chemicals industry looks little stretched at the moment when compared to its own range and the broader market.
The industry has a trailing 12-month EV/EBITDA multiple of 11.6X, which is close to the high level of 11.8X it scaled in the past one year and is also above its own average of 10.6X over that period. Moreover, the industry compares unfavorably with the market at large, as the trailing 12-month EV/EBITDA for the S&P 500 is at 10.8X and the median level is 9.9X. As such, there seems to be little room for an upside moving ahead.
What Zacks Industry Rank Says
Within the Zacks Industry classification, the chemical industry falls under the broader Basic Materials sector (one of 16 Zacks sectors) which had a 2.5% share of total earnings for the S&P 500 in 2016. We rank all of the more than 250 industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. (To learn more visit: About Zacks Industry Rank.)
We have three chemicals related industries -- Chemical Diversified, Chemical Plastics and Chemical Specialty -- at the expanded (aka "X") level. We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The Zacks Industry Rank is #60 for Chemical Plastics (placing it at the top 23% of the 250 plus Zacks classified industries), #90 for Chemical Diversified (at top 36%) and #163 for Chemical Specialty (at bottom 33%).
Looking at the exact location of these industries, one could say that the general outlook for the chemical industry is leaning toward ‘Positive.'
Q1 Earnings Picture Looks Encouragin
Looking at the overall results of the Basic Materials sector, earnings for the sector participants on the S&P 500 index for fourth-quarter 2016 rose 3.5% from the same period last year. However, total revenues for these companies slipped 0.6% in the fourth quarter.
Outlook for first-quarter 2017 looks encouraging as earnings are expected to accelerate to an 8.4% increase. Revenues are also forecast to rise 2.3% in the quarter.
For more details about the earnings of this sector and others, please read our ‘Earnings Preview’ report.
Final Thoughts
The chemical industry is finally back on track after bearing the brunt of the global economic crisis. While the industry still remains saddled by several challenges, its upturn is expected to continue this year on sustained healthy momentum in the automotive space and an upswing in the housing market. Strategic initiatives including continued focus on cost and productivity, operational efficiency improvement and expansion of scale through acquisitions should also help chemical makers weather the macroeconomic and industry-specific headwinds in 2017.
More Stock News: 8 Companies Verge on Apple-Like Run
Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.
A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>
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Chemicals Industry Stock Outlook - March 2017
The chemical industry -- which had long been out of favor -- is finally getting its groove back. Despite a spate of headwinds, the highly cyclical industry put up a decent performance in 2016, helped by continued strength across automotive and construction markets -- two major end-use markets for chemicals.
The fourth-quarter earnings season had been a good one for chemical stocks. We note that a number of companies in the space including prominent names such as Dow Chemical (DOW - Free Report) , DuPont (DD - Free Report) , PPG Industries (PPG - Free Report) , Celanese (CE - Free Report) and LyondellBasell Industries (LYB - Free Report) came up with better-than-expected earnings in the quarter. The outperformance was partly driven by an improving operating environment and strategic measures including productivity improvement, portfolio restructuring and earnings-accretive acquisitions.
Chemical companies continue to shift their focus on attractive, growth markets in an effort to cut their exposure on other businesses that are grappling with weak demand. The industry is also seeing a pick-up in consolidation activities (exhibited by a wide swath of deals in the recent past) as chemical makers are increasingly looking for cost synergy opportunities and enhanced operational scale in a still-difficult global economic environment.
Moreover, cost-cutting measures (including plant closures and headcount reduction) and productivity improvement actions by chemical companies are expected to yield industry-wide margin improvements.
Notwithstanding some lingering headwinds including concerns over China’s economy and weak demand in the energy space, the industry’s recovery momentum is expected to continue in 2017, supported by continued strength in the light vehicles market, positive trends in the construction space and significant shale-linked capital investment.
The automotive sector continues its healthy run, backed by an improving job market, rising personal income, low fuel prices and attractive financing options. A recovery across housing and commercial construction markets has been another tailwind for the chemical industry.
While the European chemical industry remains stuck in a rut given lower prices, sluggish demand for European chemical exports and weak R&D investments, prospects in the U.S. look bright this year.
U.S. Chemical Industry Set for Solid Growth
The outlook for the U.S. chemical industry paints an encouraging picture. The American chemical industry remains on course for strong growth this year and the next despite several challenges including a strong dollar, soft export markets and a low oil price environment.
The American Chemistry Council (“ACC”), an industry trade group, envisions national chemical production to rise 3.6% in 2017, further accelerating to a 4.8% growth in 2018. Chemical production increased across all regions of the country last year, per the ACC.
The trade group also expects basic chemicals production to expand 4.2% in 2017 on the back of advances in manufacturing and exports. Moreover, production in the specialties chemical segment is expected to pick up pace and rise 3% in 2017.
The ACC also expects American chemical industry’s growth to transcend the nation’s overall economic growth in the long haul. It sees domestic chemical sales to cross the $1 trillion milestone by 2020.
The shale gas boom in the U.S. has also been a huge driving force behind chemical investment on plants and equipment in the country and has provided domestic petrochemicals producers a compelling cost advantage over their global counterparts. The shale revolution has made the U.S. an attractive investment hotspot and incentivized a number of chemical companies including Dow Chemical, BASF (BASFY - Free Report) , LyondellBasell, Eastman Chemical (EMN - Free Report) and Westlake Chemical (WLK - Free Report) to pump in billions of dollars to beef up capacity. The ACC expects domestic chemical industry capital spending to increase at a 7% annual rate through 2021.
EU Chemical Sector in Limbo
The outlook for the European chemical industry looks jaded given a persistently challenging operating environment. Chemical makers in the European Union remain affected by lower prices, a challenging regulatory landscape and competitive disadvantages in terms of costs vis-à-vis the U.S. and Asia.
According to the European Chemical Industry Council (CEFIC), chemical output in the European Union rose by a paltry 0.4% year over year in 2016. Chemical prices fell 3.6% for the year. Lower pricing and modest output growth also hurt chemical sales which slipped 3% during the first eleven months of 2016. CEFIC sees modest growth of roughly 0.5% in chemical output in 2017.
Although the Eurozone economy has gained traction of late, as evident from recent upbeat economic data, it still faces certain near-term risks. The region’s growth prospects, in the short run, are likely to be stymied by political uncertainties caused by Brexit negotiations and elections in major member countries such as Germany and France.
Moreover, concerns about the impact of President Donald Trump's trade policies could hurt sentiment in the region. The European Central Bank has warned that potential protectionist policies under Trump administration could trigger financial instability and hurt EU’s trade with the U.S. as well as global growth.
A Few Lingering Concerns
The chemical industry still remains mired by several headwinds. Chemical makers are still feeling the pinch of depressed demand across agriculture and energy markets. A strong dollar is also hurting U.S. chemical exports, reducing their attractiveness in overseas markets.
Concerns over China’s future growth also remain sources of near-term uncertainties for the chemical industry. Persistent weakness in China -- a key market for chemicals -- is expected to remain as overhang on the chemical industry in the short haul. Sustained overcapacity, weak private investment and high levels of corporate debt are hurting the world’s second-largest economy.
The outlook for the fertilizer and agricultural chemicals space also remains cloudy due to continued weakness in crop commodity prices, low farm income and sluggish economic conditions in certain emerging markets including Latin America.
Valuation Looks Bit Stretched
The Chemicals industry has modestly outperformed the broader market over the past one year. The industry has gained around 13.4% over the same time frame, while the S&P 500 index advanced 12.9%.
Going by the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) multiple, a preferred valuation metric for cyclical industries like chemicals, valuation for the Chemicals industry looks little stretched at the moment when compared to its own range and the broader market.
The industry has a trailing 12-month EV/EBITDA multiple of 11.6X, which is close to the high level of 11.8X it scaled in the past one year and is also above its own average of 10.6X over that period. Moreover, the industry compares unfavorably with the market at large, as the trailing 12-month EV/EBITDA for the S&P 500 is at 10.8X and the median level is 9.9X. As such, there seems to be little room for an upside moving ahead.
What Zacks Industry Rank Says
Within the Zacks Industry classification, the chemical industry falls under the broader Basic Materials sector (one of 16 Zacks sectors) which had a 2.5% share of total earnings for the S&P 500 in 2016. We rank all of the more than 250 industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. (To learn more visit: About Zacks Industry Rank.)
We have three chemicals related industries -- Chemical Diversified, Chemical Plastics and Chemical Specialty -- at the expanded (aka "X") level. We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The Zacks Industry Rank is #60 for Chemical Plastics (placing it at the top 23% of the 250 plus Zacks classified industries), #90 for Chemical Diversified (at top 36%) and #163 for Chemical Specialty (at bottom 33%).
Looking at the exact location of these industries, one could say that the general outlook for the chemical industry is leaning toward ‘Positive.'
Q1 Earnings Picture Looks Encouragin
Looking at the overall results of the Basic Materials sector, earnings for the sector participants on the S&P 500 index for fourth-quarter 2016 rose 3.5% from the same period last year. However, total revenues for these companies slipped 0.6% in the fourth quarter.
Outlook for first-quarter 2017 looks encouraging as earnings are expected to accelerate to an 8.4% increase. Revenues are also forecast to rise 2.3% in the quarter.
For more details about the earnings of this sector and others, please read our ‘Earnings Preview’ report.
Final Thoughts
The chemical industry is finally back on track after bearing the brunt of the global economic crisis. While the industry still remains saddled by several challenges, its upturn is expected to continue this year on sustained healthy momentum in the automotive space and an upswing in the housing market. Strategic initiatives including continued focus on cost and productivity, operational efficiency improvement and expansion of scale through acquisitions should also help chemical makers weather the macroeconomic and industry-specific headwinds in 2017.
More Stock News: 8 Companies Verge on Apple-Like Run
Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.
A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>