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3 Stocks to Buy From the Rebounding Chemical Plastics Industry
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The Zacks Chemicals Plastics industry has staged a comeback on the back of a recovery in industrial demand. The uptick in demand across major end-use industries such as automotive, tire and building & construction from the coronavirus-led slump augurs well for the industry.
Covestro AG (COVTY - Free Report) , Westlake Chemical Corporation (WLK - Free Report) and Trinseo S.A. (TSE - Free Report) are well placed to benefit from the upturn in demand. Self-help measures, including reduction of operating costs, are also helping these companies to offset the pandemic-driven headwinds. The shale boom is also driving investments in capacity expansion in the United States.
About the Industry
The Zacks Chemicals Plastics industry consists of manufacturers of polymer materials for a host of end-use markets such as packaging, building & construction, transportation, electronics, containers and aerospace. These products include plastic resins such as polyethylene, polypropylene, polyvinyl chloride (PVC) and polystyrene that are made from raw materials sourced from crude oil and natural gas. Packaging and construction industries remain the mainstays of the chemical plastics industry. Building & construction is a major market for PVC. Automotive is an important consuming sector of polyethylene and polypropylene with applications in bumpers, batteries, interior linings, seats and different types of tanks, among others. Polyethylene is also widely used in the packaging market for applications in films, bags, bottles and other packaging materials.
What's Shaping the Future of the Chemical Plastics Industry?
Strong Rebound in End-market Demand: Coronavirus led to a slowdown in industrial activities globally for much of the first half of 2020, gutting demand for plastics in key end-use markets including automotive, tire, construction and textile. However, demand started to pick up from the third quarter of 2020 with a rebound in industrial and manufacturing activities globally from the pandemic-induced slowdown. Demand for PVC resin is strengthening with the revival in the construction sector, following the easing of lockdowns and restrictions. The strength in the residential construction market is driving demand for PVC globally. An accelerated recovery in the automotive sector from the virus-led slump also augurs well for demand for polyethylene — the most widely consumed polymer globally. Demand has also picked up in tire applications. Demand for polyethylene also remains strong in food packaging. The pandemic has led to a surge in demand for food packaging, thanks to the rise in consumption of packed products. Higher industrial activities are expected to spruce up demand for plastic products.
Self-help Actions to Support Margins: The companies in this space are taking a host of strategic measures including structural cost reduction, operational efficiency improvement and working capital management, to stay afloat in the wake of the pandemic. In order to whittle down costs, the industry participants are aggressively implementing actions, which include reduction of discretionary spending and traveling expenses, furloughs and salary cuts. These moves are likely to help the industry in sustaining margins amid pandemic-induced challenges.
Shale Boom Fueling Capacity Expansion: The U.S. chemical plastics industry is enjoying the advantage of access to abundant and cheap ethane feedstock extracted from shale gas. The shale bounty has provided U.S. plastics producers a compelling cost advantage over their global counterparts, which use oil-based feedstock such as naptha. This is driving investment in plastic production projects in the U.S. Gulf Coast to beef up capacity. The shale boom has incentivized a number of companies to plough billions of dollars for setting up crackers in the United States to make key feedstock like ethylene and propylene in a cost-effective way. Such investments should boost capacity.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Chemicals Plastics industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #60, which places it at the top 24% 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 an upbeat 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 Plastics industry has outperformed the broader Zacks Basic Materials sector and the Zacks S&P 500 composite in the past year.
The industry has gained 74.4% against the S&P 500’s rise of 39.4% and the broader sector’s growth of 40.4%.
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 6.59X, below the S&P 500’s 17.82X and the sector’s 8.11X.
Over the past five years, the industry has traded as high as 11.14X, as low as 4.08X, with a median of 7.32X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Chemical Plastics Stocks to Keep a Close Eye on
Westlake Chemical: Texas-based Westlake Chemical is a vertically integrated international producer and supplier of petrochemicals, polymers and building products. The company should benefit from higher demand in its polyethylene business in specialty applications, especially food packaging, and strength in global demand for PVC resin. It is seeing strong demand in the downstream building products business on the back of new housing starts and spending on repair and remodeling activities. The company will also gain from its investment in capacity expansion projects, synergies of acquisitions, and actions to improve operating efficiency and reduce costs.
Westlake Chemical sports a Zacks Rank #1 (Strong Buy). It has expected earnings growth of 383.4% for the current year. The Zacks Consensus Estimate for earnings for the current year has been revised 25.5% upward over the last 60 days. The stock has also gained 68.6% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price: WLK
Trinseo: The Pennsylvania-based company manufacturers and markets plastics, latex binders and synthetic rubber. The company is expected to benefit from demand strength in end markets such as tires, automotive, appliances, construction and packaging, which is likely to drive its volumes. Benefits of cost-reduction and commercial excellence initiatives are also expected to get reflected on its performance. Moreover, the acquisition of Arkema’s polymethyl methacrylates and activated methyl methacrylates businesses allows the company to transform to a higher-margin, less-cyclical solutions provider. The buyout is expected to deliver meaningful cost synergies and IT-related productivity savings.
The company, carrying a Zacks Rank #1, has expected earnings growth of 378.1% for the current year. The consensus estimate for the current year has been revised 31.4% upward over the last 60 days. The stock has also shot up 172% over the past year.
Price: TSE
Covestro: Germany-based Covestro makes and markets high-quality polymers for various industries worldwide. The company is expected to benefit from the rebound in automotive and construction end-use markets. Its cost-saving actions are also expected to lend support to its margins. The acquisition of Royal DSM’s Resins & Functional Materials business also expands the company’s portfolio in the attractive growth market for sustainable coating resins and provides considerable synergies.
Covestro currently carries a Zacks Rank #2 (Buy). It has expected earnings growth of 154.2% for the current year. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 12.8% upward over the last 60 days. The company has also seen its shares rally 63.9% over the past year.
Price: COVTY
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor. Today, See These 5 Potential Home Runs >>
See More Zacks Research for These Tickers
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3 Stocks to Buy From the Rebounding Chemical Plastics Industry
The Zacks Chemicals Plastics industry has staged a comeback on the back of a recovery in industrial demand. The uptick in demand across major end-use industries such as automotive, tire and building & construction from the coronavirus-led slump augurs well for the industry.
Covestro AG (COVTY - Free Report) , Westlake Chemical Corporation (WLK - Free Report) and Trinseo S.A. (TSE - Free Report) are well placed to benefit from the upturn in demand. Self-help measures, including reduction of operating costs, are also helping these companies to offset the pandemic-driven headwinds. The shale boom is also driving investments in capacity expansion in the United States.
About the Industry
The Zacks Chemicals Plastics industry consists of manufacturers of polymer materials for a host of end-use markets such as packaging, building & construction, transportation, electronics, containers and aerospace. These products include plastic resins such as polyethylene, polypropylene, polyvinyl chloride (PVC) and polystyrene that are made from raw materials sourced from crude oil and natural gas. Packaging and construction industries remain the mainstays of the chemical plastics industry. Building & construction is a major market for PVC. Automotive is an important consuming sector of polyethylene and polypropylene with applications in bumpers, batteries, interior linings, seats and different types of tanks, among others. Polyethylene is also widely used in the packaging market for applications in films, bags, bottles and other packaging materials.
What's Shaping the Future of the Chemical Plastics Industry?
Strong Rebound in End-market Demand: Coronavirus led to a slowdown in industrial activities globally for much of the first half of 2020, gutting demand for plastics in key end-use markets including automotive, tire, construction and textile. However, demand started to pick up from the third quarter of 2020 with a rebound in industrial and manufacturing activities globally from the pandemic-induced slowdown. Demand for PVC resin is strengthening with the revival in the construction sector, following the easing of lockdowns and restrictions. The strength in the residential construction market is driving demand for PVC globally. An accelerated recovery in the automotive sector from the virus-led slump also augurs well for demand for polyethylene — the most widely consumed polymer globally. Demand has also picked up in tire applications. Demand for polyethylene also remains strong in food packaging. The pandemic has led to a surge in demand for food packaging, thanks to the rise in consumption of packed products. Higher industrial activities are expected to spruce up demand for plastic products.
Self-help Actions to Support Margins: The companies in this space are taking a host of strategic measures including structural cost reduction, operational efficiency improvement and working capital management, to stay afloat in the wake of the pandemic. In order to whittle down costs, the industry participants are aggressively implementing actions, which include reduction of discretionary spending and traveling expenses, furloughs and salary cuts. These moves are likely to help the industry in sustaining margins amid pandemic-induced challenges.
Shale Boom Fueling Capacity Expansion: The U.S. chemical plastics industry is enjoying the advantage of access to abundant and cheap ethane feedstock extracted from shale gas. The shale bounty has provided U.S. plastics producers a compelling cost advantage over their global counterparts, which use oil-based feedstock such as naptha. This is driving investment in plastic production projects in the U.S. Gulf Coast to beef up capacity. The shale boom has incentivized a number of companies to plough billions of dollars for setting up crackers in the United States to make key feedstock like ethylene and propylene in a cost-effective way. Such investments should boost capacity.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Chemicals Plastics industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #60, which places it at the top 24% 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 an upbeat 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 Plastics industry has outperformed the broader Zacks Basic Materials sector and the Zacks S&P 500 composite in the past year.
The industry has gained 74.4% against the S&P 500’s rise of 39.4% and the broader sector’s growth of 40.4%.
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 6.59X, below the S&P 500’s 17.82X and the sector’s 8.11X.
Over the past five years, the industry has traded as high as 11.14X, as low as 4.08X, with a median of 7.32X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Chemical Plastics Stocks to Keep a Close Eye on
Westlake Chemical: Texas-based Westlake Chemical is a vertically integrated international producer and supplier of petrochemicals, polymers and building products. The company should benefit from higher demand in its polyethylene business in specialty applications, especially food packaging, and strength in global demand for PVC resin. It is seeing strong demand in the downstream building products business on the back of new housing starts and spending on repair and remodeling activities. The company will also gain from its investment in capacity expansion projects, synergies of acquisitions, and actions to improve operating efficiency and reduce costs.
Westlake Chemical sports a Zacks Rank #1 (Strong Buy). It has expected earnings growth of 383.4% for the current year. The Zacks Consensus Estimate for earnings for the current year has been revised 25.5% upward over the last 60 days. The stock has also gained 68.6% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price: WLK
Trinseo: The Pennsylvania-based company manufacturers and markets plastics, latex binders and synthetic rubber. The company is expected to benefit from demand strength in end markets such as tires, automotive, appliances, construction and packaging, which is likely to drive its volumes. Benefits of cost-reduction and commercial excellence initiatives are also expected to get reflected on its performance. Moreover, the acquisition of Arkema’s polymethyl methacrylates and activated methyl methacrylates businesses allows the company to transform to a higher-margin, less-cyclical solutions provider. The buyout is expected to deliver meaningful cost synergies and IT-related productivity savings.
The company, carrying a Zacks Rank #1, has expected earnings growth of 378.1% for the current year. The consensus estimate for the current year has been revised 31.4% upward over the last 60 days. The stock has also shot up 172% over the past year.
Price: TSE
Covestro: Germany-based Covestro makes and markets high-quality polymers for various industries worldwide. The company is expected to benefit from the rebound in automotive and construction end-use markets. Its cost-saving actions are also expected to lend support to its margins. The acquisition of Royal DSM’s Resins & Functional Materials business also expands the company’s portfolio in the attractive growth market for sustainable coating resins and provides considerable synergies.
Covestro currently carries a Zacks Rank #2 (Buy). It has expected earnings growth of 154.2% for the current year. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 12.8% upward over the last 60 days. The company has also seen its shares rally 63.9% over the past year.
Price: COVTY
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Today, See These 5 Potential Home Runs >>