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4 Diversified Chemical Stocks Set to Ride the Industry's Upswing
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The Zacks Chemicals Diversified industry has rebounded strongly after bearing the brunt of the coronavirus fallout. A strong revival in demand in major end-markets from the pandemic-led downturn and strengthening manufacturing activities have put the wind back in the sails of the industry.
Dow Inc. (DOW - Free Report) , PPG Industries Inc. (PPG - Free Report) , Olin Corporation (OLN - Free Report) and Cabot Corporation (CBT - Free Report) are well placed to benefit from an improving demand environment. 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-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 Revival 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. Weaker demand coupled with a sharp contraction in oil prices also exerted pressure on the product prices of chemical makers. 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 and the economic rebound in China — a top consumer of chemicals. The pace of recovery in China’s manufacturing activities has accelerated on strong domestic demand. The automotive industry has also gotten back into the groove following the virus-led slump 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. The construction sector has also bounced back with the resumption of many projects. As major end-use markets recover, demand for chemicals is expected to go up, thereby driving sales volumes and top lines of the players in this space.
Strategic Actions to Drive 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 raw material cost inflation and initiatives to strengthen the 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 the pandemic-induced 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 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. 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 #69, which places it at the top 27% 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 Outperforms Sector and S&P 500
The Zacks Chemicals Diversified industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 71.8% over this period compared with the S&P 500’s rise of 49.7% and the broader sector’s growth of 66.4%.
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 12.17X, below the S&P 500’s 16.42X and above the sector’s 9.82X.
Over the past five years, the industry has traded as high as 13.43X, as low as 5.19X and at the median of 7.74X, 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
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 invest 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.
Dow currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year earnings has been revised 70.9% 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 26.5%. Moreover, its shares have shot up around 94% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DOW
Olin: Based in Missouri, Olin is a vertically integrated global producer and distributor of chemical products, carrying a Zacks Rank #1. 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 441.5% for the current year. Moreover, the consensus estimate for current-year earnings has been revised 287.4% upward over the last 60 days. The company's shares have also surged around 287% over the past six months.
Price and Consensus: OLN
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, Alpha Coating Technologies and Ennis-Flint are expected to contribute to the company’s top line this year.
The company currently has a Zacks Rank #2 (Buy). It has expected earnings growth of 41.8% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 7.2% 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 18.3%. The stock has also rallied around 96% over the past six months.
Price and Consensus: PPG
Cabot: Massachusetts-based Cabot is a leading global specialty chemicals and performance materials company. The company should gain from a recovery in demand from its automotive and tire customers from the pandemic-led slowdown, its disciplined execution of operations and targeted growth initiatives. Cabot is seeing strong volumes in the tire and automotive markets on the back of continued global recovery. The company should 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 #2. It has expected earnings growth of 92.8% for the current fiscal year. Moreover, the consensus estimate for earnings for the current fiscal has been revised 5.5% upward over the last 60 days. The company’s shares have also shot up around 79% over the past six months.
Price and Consensus: CBT
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 77 billion devices by 2025, creating a $1.3 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 4 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2022.
Image: Bigstock
4 Diversified Chemical Stocks Set to Ride the Industry's Upswing
The Zacks Chemicals Diversified industry has rebounded strongly after bearing the brunt of the coronavirus fallout. A strong revival in demand in major end-markets from the pandemic-led downturn and strengthening manufacturing activities have put the wind back in the sails of the industry.
Dow Inc. (DOW - Free Report) , PPG Industries Inc. (PPG - Free Report) , Olin Corporation (OLN - Free Report) and Cabot Corporation (CBT - Free Report) are well placed to benefit from an improving demand environment. 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-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, 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 Revival 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. Weaker demand coupled with a sharp contraction in oil prices also exerted pressure on the product prices of chemical makers. 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 and the economic rebound in China — a top consumer of chemicals. The pace of recovery in China’s manufacturing activities has accelerated on strong domestic demand. The automotive industry has also gotten back into the groove following the virus-led slump 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. The construction sector has also bounced back with the resumption of many projects. As major end-use markets recover, demand for chemicals is expected to go up, thereby driving sales volumes and top lines of the players in this space.
Strategic Actions to Drive 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 raw material cost inflation and initiatives to strengthen the 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 the pandemic-induced 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 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. 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 #69, which places it at the top 27% 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 Outperforms Sector and S&P 500
The Zacks Chemicals Diversified industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 71.8% over this period compared with the S&P 500’s rise of 49.7% and the broader sector’s growth of 66.4%.
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 12.17X, below the S&P 500’s 16.42X and above the sector’s 9.82X.
Over the past five years, the industry has traded as high as 13.43X, as low as 5.19X and at the median of 7.74X, 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
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 invest 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.
Dow currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year earnings has been revised 70.9% 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 26.5%. Moreover, its shares have shot up around 94% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DOW
Olin: Based in Missouri, Olin is a vertically integrated global producer and distributor of chemical products, carrying a Zacks Rank #1. 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 441.5% for the current year. Moreover, the consensus estimate for current-year earnings has been revised 287.4% upward over the last 60 days. The company's shares have also surged around 287% over the past six months.
Price and Consensus: OLN
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, Alpha Coating Technologies and Ennis-Flint are expected to contribute to the company’s top line this year.
The company currently has a Zacks Rank #2 (Buy). It has expected earnings growth of 41.8% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 7.2% 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 18.3%. The stock has also rallied around 96% over the past six months.
Price and Consensus: PPG
Cabot: Massachusetts-based Cabot is a leading global specialty chemicals and performance materials company. The company should gain from a recovery in demand from its automotive and tire customers from the pandemic-led slowdown, its disciplined execution of operations and targeted growth initiatives. Cabot is seeing strong volumes in the tire and automotive markets on the back of continued global recovery. The company should 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 #2. It has expected earnings growth of 92.8% for the current fiscal year. Moreover, the consensus estimate for earnings for the current fiscal has been revised 5.5% upward over the last 60 days. The company’s shares have also shot up around 79% over the past six months.
Price and Consensus: CBT
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 77 billion devices by 2025, creating a $1.3 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 4 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2022.
Click here for the 4 trades >>