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4 Diversified Chemical Stocks Set to Ride the Industry's Upturn
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The Zacks Chemicals Diversified industry has staged a comeback from the coronavirus-induced slowdown in the first half of 2020. The upturn in demand across major end-use industries such as automotive and construction from the pandemic-led slump has pulled the industry out of its slumber.
PPG Industries Inc. (PPG - Free Report) , The Chemours Company (CC - Free Report) , Cabot Corporation (CBT - Free Report) and Koppers Holdings Inc. (KOP - Free Report) are well placed to benefit from an improving demand environment. Strategic actions, including reduction of operating costs, are also helping these companies to navigate these turbulent times.
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-use 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, surfactants, specialty polymers, coating additives and oilfield chemicals 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?
Demand Rebound to Boost Prospects: Coronavirus brought global industrial activities to a grinding halt for much of the first half due to the unprecedented rollout of lockdowns and restrictions by governments around the world. This led to a slump in demand for chemicals in key major markets, including automotive, construction and electronics. Weaker demand coupled with a sharp decline in oil prices also exerted pressure on the product prices of chemical makers. However, demand started to recover in the third quarter with the resumption of global economic activities following the easing of restrictions. The uptick in demand is being driven by recovering manufacturing and industrial activities globally and the economic rebound in China. The automotive industry has also gotten back into gear following the virus-led disruptions riding on pent-up demand and the shift toward private transportation. A rebound in automotive OEM production rates has led to a recovery in demand for chemicals. Moreover, the resumption of many projects, which were earlier put on hold due to labor shortages and supply chain disruptions, supported the rebound in the construction sector. As major end-use markets recover, demand for chemicals is expected to go up, thereby driving sales volumes and top lines of players in this space.
Strategic Measures to Aid Results: The companies in this space are taking a host of strategic measures including cost-cutting and productivity improvement, re-structuring, operational efficiency improvement, actions to raise selling prices to counter cost inflation and initiatives to strengthen balance sheet and boost cash flows. In particular, the industry participants are aggressively implementing actions to bring down costs, which include reduction of discretionary spending and traveling expenses. These moves are likely to help the industry in sustaining margins amid challenges.
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 tariff 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. There is also the concern that trade tariffs currently in place may impede new chemical investments in capacity expansion in the United States.
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 #107, which places it at the top 42% 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 Lags Sector and S&P 500
The Zacks Chemicals Diversified industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 10.4% over this period compared with the S&P 500’s rise of 17.1% and the broader sector’s growth of 17.9%.
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 9.77X, below the S&P 500’s 16.79X and the sector’s 10.76X.
Over the past five years, the industry has traded as high as 13.12X, as low as 5.19X and at the median of 7.62X, 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
Chemours: Based in Delaware, Chemours is a leading provider of performance chemicals. The company is expected to benefit from improved customer demand for refrigerants, especially in the automotive sector on a rebound in automotive OEM production rates. It should also gain from increasing adoption of the Opteon platform and growing applications of fluoropolymers, especially in the automotive, electronics and energy end-markets. Moreover, the company stands to gain from its efforts to reduce costs.
Chemours currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year earnings has been revised 10.7% 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 54.1%. Moreover, its shares have shot up around 76% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: CC
Cabot: Massachusetts-based Cabot is a leading global specialty chemicals and performance materials company. It should gain from a recovery in demand from its automotive and tire customers from the pandemic-led slowdown. It will also benefit from the acquisition of Shenzhen Sanshun Nano New Materials. The acquisition significantly bolsters the market position and formulation capabilities of Cabot in the high-growth batteries market, especially in China.
The company currently carries a Zacks Rank #1. It has expected earnings growth of 61.5% for the current fiscal year. Moreover, the consensus estimate for earnings for the current fiscal has been revised 24.4% upward over the last 60 days. The company’s shares have also gained around 21% over the past six months.
Price and Consensus: CBT
PPG Industries: Pennsylvania-based PPG makes and distributes paints, coatings, and specialty materials globally. It is executing an aggressive cost-cutting and restructuring strategy, which is expected to support its bottom line. It is also taking steps to grow business inorganically through strategic acquisitions. Acquisitions including Industria Chimica Reggiana and Alpha Coating Technologies are expected to contribute to the company’s top line this year.
The company currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings for PPG has been revised 0.2% upward over the last 60 days. The company has also delivered an earnings surprise of 12.3%, on average, over the trailing four quarters. The stock has also rallied around 40% over the past six months.
Price and Consensus: PPG
Koppers: This Pennsylvania-based company is a global provider of wood treatment chemicals, treated wood products and carbon compounds. Koppers is witnessing strong demand for residential wood treatment preservatives in most geographic regions. It remains focused on capturing growth opportunities in wood preservation. It also remains committed to delivering strong cash flows and reducing debt.
Koppers, carrying a Zacks Rank #2, has expected earnings growth of 16.3% for the current year. The company has also delivered an earnings surprise of 25.3%, on average, over the trailing four quarters. Moreover, the consensus estimate for current-year earnings has been revised 12.6% upward over the last 60 days. The stock has also surged 60% over the past six months.
Price and Consensus: KOP
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.4% per year.
These 7 were selected because of their superior potential for immediate breakout.
Image: Bigstock
4 Diversified Chemical Stocks Set to Ride the Industry's Upturn
The Zacks Chemicals Diversified industry has staged a comeback from the coronavirus-induced slowdown in the first half of 2020. The upturn in demand across major end-use industries such as automotive and construction from the pandemic-led slump has pulled the industry out of its slumber.
PPG Industries Inc. (PPG - Free Report) , The Chemours Company (CC - Free Report) , Cabot Corporation (CBT - Free Report) and Koppers Holdings Inc. (KOP - Free Report) are well placed to benefit from an improving demand environment. Strategic actions, including reduction of operating costs, are also helping these companies to navigate these turbulent times.
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-use 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, surfactants, specialty polymers, coating additives and oilfield chemicals 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.
Some of the prominent industry players are Dow Inc. (DOW - Free Report) , Air Products and Chemicals, Inc. (APD - Free Report) , DuPont de Nemours, Inc. (DD - Free Report) , LyondellBasell Industries N.V. (LYB - Free Report) , Eastman Chemical Company (EMN - Free Report) , FMC Corporation (FMC - Free Report) and Albemarle Corporation (ALB - Free Report) .
What’s Shaping the Future of the Chemicals Diversified Industry?
Demand Rebound to Boost Prospects: Coronavirus brought global industrial activities to a grinding halt for much of the first half due to the unprecedented rollout of lockdowns and restrictions by governments around the world. This led to a slump in demand for chemicals in key major markets, including automotive, construction and electronics. Weaker demand coupled with a sharp decline in oil prices also exerted pressure on the product prices of chemical makers. However, demand started to recover in the third quarter with the resumption of global economic activities following the easing of restrictions. The uptick in demand is being driven by recovering manufacturing and industrial activities globally and the economic rebound in China. The automotive industry has also gotten back into gear following the virus-led disruptions riding on pent-up demand and the shift toward private transportation. A rebound in automotive OEM production rates has led to a recovery in demand for chemicals. Moreover, the resumption of many projects, which were earlier put on hold due to labor shortages and supply chain disruptions, supported the rebound in the construction sector. As major end-use markets recover, demand for chemicals is expected to go up, thereby driving sales volumes and top lines of players in this space.
Strategic Measures to Aid Results: The companies in this space are taking a host of strategic measures including cost-cutting and productivity improvement, re-structuring, operational efficiency improvement, actions to raise selling prices to counter cost inflation and initiatives to strengthen balance sheet and boost cash flows. In particular, the industry participants are aggressively implementing actions to bring down costs, which include reduction of discretionary spending and traveling expenses. These moves are likely to help the industry in sustaining margins amid challenges.
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 tariff 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. There is also the concern that trade tariffs currently in place may impede new chemical investments in capacity expansion in the United States.
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 #107, which places it at the top 42% 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 Lags Sector and S&P 500
The Zacks Chemicals Diversified industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 10.4% over this period compared with the S&P 500’s rise of 17.1% and the broader sector’s growth of 17.9%.
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 9.77X, below the S&P 500’s 16.79X and the sector’s 10.76X.
Over the past five years, the industry has traded as high as 13.12X, as low as 5.19X and at the median of 7.62X, 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
Chemours: Based in Delaware, Chemours is a leading provider of performance chemicals. The company is expected to benefit from improved customer demand for refrigerants, especially in the automotive sector on a rebound in automotive OEM production rates. It should also gain from increasing adoption of the Opteon platform and growing applications of fluoropolymers, especially in the automotive, electronics and energy end-markets. Moreover, the company stands to gain from its efforts to reduce costs.
Chemours currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year earnings has been revised 10.7% 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 54.1%. Moreover, its shares have shot up around 76% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: CC
Cabot: Massachusetts-based Cabot is a leading global specialty chemicals and performance materials company. It should gain from a recovery in demand from its automotive and tire customers from the pandemic-led slowdown. It will also benefit from the acquisition of Shenzhen Sanshun Nano New Materials. The acquisition significantly bolsters the market position and formulation capabilities of Cabot in the high-growth batteries market, especially in China.
The company currently carries a Zacks Rank #1. It has expected earnings growth of 61.5% for the current fiscal year. Moreover, the consensus estimate for earnings for the current fiscal has been revised 24.4% upward over the last 60 days. The company’s shares have also gained around 21% over the past six months.
Price and Consensus: CBT
PPG Industries: Pennsylvania-based PPG makes and distributes paints, coatings, and specialty materials globally. It is executing an aggressive cost-cutting and restructuring strategy, which is expected to support its bottom line. It is also taking steps to grow business inorganically through strategic acquisitions. Acquisitions including Industria Chimica Reggiana and Alpha Coating Technologies are expected to contribute to the company’s top line this year.
The company currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings for PPG has been revised 0.2% upward over the last 60 days. The company has also delivered an earnings surprise of 12.3%, on average, over the trailing four quarters. The stock has also rallied around 40% over the past six months.
Price and Consensus: PPG
Koppers: This Pennsylvania-based company is a global provider of wood treatment chemicals, treated wood products and carbon compounds. Koppers is witnessing strong demand for residential wood treatment preservatives in most geographic regions. It remains focused on capturing growth opportunities in wood preservation. It also remains committed to delivering strong cash flows and reducing debt.
Koppers, carrying a Zacks Rank #2, has expected earnings growth of 16.3% for the current year. The company has also delivered an earnings surprise of 25.3%, on average, over the trailing four quarters. Moreover, the consensus estimate for current-year earnings has been revised 12.6% upward over the last 60 days. The stock has also surged 60% over the past six months.
Price and Consensus: KOP
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.4% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>