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4 Chemical Specialty Stocks to Gain From Demand Recovery
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The Zacks Chemicals Specialty industry is expected to benefit from a demand rebound in key markets, as the unprecedented customer inventory destocking that plagued the industry for much of 2023 is nearing completion.
Industry players like PPG Industries, Inc. (PPG - Free Report) , Daqo New Energy Corp. (DQ - Free Report) , Hawkins, Inc. (HWKN - Free Report) and American Vanguard Corporation (AVD - Free Report) are poised to benefit from improved demand. Strategic actions, including operating cost reductions, are also expected to help these companies navigate a still-challenging environment.
About the Industry
The Zacks Chemicals Specialty industry consists of manufacturers of specialty chemical products for a host of end-use markets such as textile, paper, automotive, electronics, personal care, energy, construction, food & beverages and agriculture. These chemicals (including catalysts, surfactants, specialty polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose. Specialty chemicals can be single molecules or a combination of molecules referred to as formulations, and they provide a vast range of effects upon which various industries rely. Their compositions significantly influence the performance of the finished products. Specialty chemicals have applications in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.
What's Shaping the Future of the Chemical Specialty Industry?
Improved End-Market Demand Augurs Well: Companies in the chemical specialty space are expected to gain from a pick-up in demand across several major industries — including automotive and construction. Demand in the automotive market has improved, aided by a recovery in automotive production on the back of improved supply of semiconductors and other key inputs. Automotive OEM production is expected to rise in 2024 with the easing of the chip supply shortage. The resolution to the six-week United Auto Workers strike also augurs well for chemical demand in automotive. Moreover, a recovery in demand in building & construction, consumer durables, agriculture and personal care bodes well for specialty chemical companies. On a positive note, the customer inventory destocking in these key markets has largely ended, leading to low inventory levels. The destocking in 2023 was primarily driven by high inflation and the lingering impacts of the pandemic that affected customer spending. Improved end-market demand is likely to support volumes of specialty chemical companies over the near term.
Self-Help Actions to Aid Results: The companies in this space are executing a raft of self-help measures — including cost-cutting and productivity improvement, expansion into high-growth markets, restructuring, operational efficiency improvement, and actions to strengthen the balance sheet and boost cash flows — in a bid to stay afloat amid the prevailing headwinds. Notably, the industry participants are aggressively implementing actions to cut costs. The measures are likely to help the companies sail through the ongoing challenges.
Cost Pressure Still a Worry: Specialty chemical makers are facing headwinds from raw material cost inflation, and supply-chain and freight transportation disruptions. The closure of a large swath of factories to stem the spread of the COVID-19 outbreak disrupted the global supply chain. The Russia-Ukraine conflict and new lockdowns in China put further pressure on the global supply chain. These affected the availability of key raw materials for the chemical specialty industry. Some companies are also facing challenges from elevated logistics and labor costs. While raw material costs have moderated somewhat lately, driven by the easing of supply-chain disruptions, they remain higher than the pre-pandemic levels. The lingering impacts of inflationary pressures are expected to continue over the short haul and weigh on the margins of chemical specialty companies.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #68, which places it in 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 Specialty 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 25.6% over this period compared with the S&P 500’s rise of 24.8% and the broader sector’s increase of 8.8%.
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 11.72X, below the S&P 500’s 15.06X and the sector’s 11.74X.
Over the past five years, the industry has traded as high as 13.91X, as low as 7.1X, with a median of 10.6X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 Chemical Specialty Stocks to Keep a Close Eye on
Daqo New Energy: China-based Daqo New Energy is a leading producer of high-purity polysilicon. Strong demand for solar energy products and higher polysilicon pricing is expected to drive its results. DQ’s facilities are running with increased efficiency, which is likely to boost production volumes. The company’s efforts to improve its cost structure should also support its margins. Its energy efficiency efforts and enhanced manufacturing efficiencies are contributing to lower costs. It is expected to gain from lower production costs aided by improved operational efficiency in its facilities.
Daqo New Energy currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year earnings for DQ has been revised 6.6% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DQ
American Vanguard: California-based American Vanguard is a diversified specialty and agricultural products company focusing on crop protection, turf and ornamental management, and commercial and consumer pest control. AVD is benefiting from a rebound following challenges such as global destocking within the distribution channel, oversupply of Chinese generic products in various regions and supply-chain disruptions. It is strongly positioned within domestic and international markets. The company is expected to gain from actions to maintain strong gross profit margins, exercise tight control over operating expenses and ensure operational efficiency. Its business transformation initiatives are also expected to drive results.
American Vanguard, presently carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 196.2% for the current year. The Zacks Consensus Estimate for AVD’s earnings for the current year has been revised 8.5% upward over the last 60 days.
Price and Consensus: AVD
PPG Industries: Based in Pennsylvania, PPG Industries is a global supplier of paints, coatings and specialty materials. The company is benefiting from cost savings from restructuring activities, pricing actions and synergies of strategic acquisitions. It is implementing a cost-cutting and restructuring strategy, as well as optimizing its working capital requirements. The cost savings generated by restructuring initiatives will act as a tailwind. The company is also undertaking measures to expand business inorganically through value-creating acquisitions. PPG also remains committed to maximizing shareholder returns.
PPG Industries, carrying a Zacks Rank #3 (Hold), has an expected earnings growth rate of 10.2% for the current year. PPG’s earnings beat the Zacks Consensus Estimate in each of the last four quarters at an average of roughly 7.7%.
Price and Consensus: PPG
Hawkins: Minnesota-based Hawkins is a leading specialty chemical and ingredients company that formulates, distributes, blends, and manufactures products for its customers. Hawkins is seeing strong growth in its Water Treatment segment, reflecting its strategic emphasis on the water treatment sector, including the successful integration of recent acquisitions. Demonstrating its commitment to expanding its water treatment business, Hawkins recently acquired Industrial Research Corporation. Its judicious pricing strategy to counter cost inflation is also supporting results. HWKN also remains committed to enhancing shareholders’ value.
Hawkins, carrying a Zacks Rank #3, has expected earnings growth of 26.2% for the current fiscal year. The Zacks Consensus Estimate for HWKN’s earnings for the current fiscal has been stable over the last 60 days. The company also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 30.6%.
Price and Consensus: HWKN
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4 Chemical Specialty Stocks to Gain From Demand Recovery
The Zacks Chemicals Specialty industry is expected to benefit from a demand rebound in key markets, as the unprecedented customer inventory destocking that plagued the industry for much of 2023 is nearing completion.
Industry players like PPG Industries, Inc. (PPG - Free Report) , Daqo New Energy Corp. (DQ - Free Report) , Hawkins, Inc. (HWKN - Free Report) and American Vanguard Corporation (AVD - Free Report) are poised to benefit from improved demand. Strategic actions, including operating cost reductions, are also expected to help these companies navigate a still-challenging environment.
About the Industry
The Zacks Chemicals Specialty industry consists of manufacturers of specialty chemical products for a host of end-use markets such as textile, paper, automotive, electronics, personal care, energy, construction, food & beverages and agriculture. These chemicals (including catalysts, surfactants, specialty polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose. Specialty chemicals can be single molecules or a combination of molecules referred to as formulations, and they provide a vast range of effects upon which various industries rely. Their compositions significantly influence the performance of the finished products. Specialty chemicals have applications in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.
What's Shaping the Future of the Chemical Specialty Industry?
Improved End-Market Demand Augurs Well: Companies in the chemical specialty space are expected to gain from a pick-up in demand across several major industries — including automotive and construction. Demand in the automotive market has improved, aided by a recovery in automotive production on the back of improved supply of semiconductors and other key inputs. Automotive OEM production is expected to rise in 2024 with the easing of the chip supply shortage. The resolution to the six-week United Auto Workers strike also augurs well for chemical demand in automotive. Moreover, a recovery in demand in building & construction, consumer durables, agriculture and personal care bodes well for specialty chemical companies. On a positive note, the customer inventory destocking in these key markets has largely ended, leading to low inventory levels. The destocking in 2023 was primarily driven by high inflation and the lingering impacts of the pandemic that affected customer spending. Improved end-market demand is likely to support volumes of specialty chemical companies over the near term.
Self-Help Actions to Aid Results: The companies in this space are executing a raft of self-help measures — including cost-cutting and productivity improvement, expansion into high-growth markets, restructuring, operational efficiency improvement, and actions to strengthen the balance sheet and boost cash flows — in a bid to stay afloat amid the prevailing headwinds. Notably, the industry participants are aggressively implementing actions to cut costs. The measures are likely to help the companies sail through the ongoing challenges.
Cost Pressure Still a Worry: Specialty chemical makers are facing headwinds from raw material cost inflation, and supply-chain and freight transportation disruptions. The closure of a large swath of factories to stem the spread of the COVID-19 outbreak disrupted the global supply chain. The Russia-Ukraine conflict and new lockdowns in China put further pressure on the global supply chain. These affected the availability of key raw materials for the chemical specialty industry. Some companies are also facing challenges from elevated logistics and labor costs. While raw material costs have moderated somewhat lately, driven by the easing of supply-chain disruptions, they remain higher than the pre-pandemic levels. The lingering impacts of inflationary pressures are expected to continue over the short haul and weigh on the margins of chemical specialty companies.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #68, which places it in 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 Specialty 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 25.6% over this period compared with the S&P 500’s rise of 24.8% and the broader sector’s increase of 8.8%.
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 11.72X, below the S&P 500’s 15.06X and the sector’s 11.74X.
Over the past five years, the industry has traded as high as 13.91X, as low as 7.1X, with a median of 10.6X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 Chemical Specialty Stocks to Keep a Close Eye on
Daqo New Energy: China-based Daqo New Energy is a leading producer of high-purity polysilicon. Strong demand for solar energy products and higher polysilicon pricing is expected to drive its results. DQ’s facilities are running with increased efficiency, which is likely to boost production volumes. The company’s efforts to improve its cost structure should also support its margins. Its energy efficiency efforts and enhanced manufacturing efficiencies are contributing to lower costs. It is expected to gain from lower production costs aided by improved operational efficiency in its facilities.
Daqo New Energy currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year earnings for DQ has been revised 6.6% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DQ
American Vanguard: California-based American Vanguard is a diversified specialty and agricultural products company focusing on crop protection, turf and ornamental management, and commercial and consumer pest control. AVD is benefiting from a rebound following challenges such as global destocking within the distribution channel, oversupply of Chinese generic products in various regions and supply-chain disruptions. It is strongly positioned within domestic and international markets. The company is expected to gain from actions to maintain strong gross profit margins, exercise tight control over operating expenses and ensure operational efficiency. Its business transformation initiatives are also expected to drive results.
American Vanguard, presently carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 196.2% for the current year. The Zacks Consensus Estimate for AVD’s earnings for the current year has been revised 8.5% upward over the last 60 days.
Price and Consensus: AVD
PPG Industries: Based in Pennsylvania, PPG Industries is a global supplier of paints, coatings and specialty materials. The company is benefiting from cost savings from restructuring activities, pricing actions and synergies of strategic acquisitions. It is implementing a cost-cutting and restructuring strategy, as well as optimizing its working capital requirements. The cost savings generated by restructuring initiatives will act as a tailwind. The company is also undertaking measures to expand business inorganically through value-creating acquisitions. PPG also remains committed to maximizing shareholder returns.
PPG Industries, carrying a Zacks Rank #3 (Hold), has an expected earnings growth rate of 10.2% for the current year. PPG’s earnings beat the Zacks Consensus Estimate in each of the last four quarters at an average of roughly 7.7%.
Price and Consensus: PPG
Hawkins: Minnesota-based Hawkins is a leading specialty chemical and ingredients company that formulates, distributes, blends, and manufactures products for its customers. Hawkins is seeing strong growth in its Water Treatment segment, reflecting its strategic emphasis on the water treatment sector, including the successful integration of recent acquisitions. Demonstrating its commitment to expanding its water treatment business, Hawkins recently acquired Industrial Research Corporation. Its judicious pricing strategy to counter cost inflation is also supporting results. HWKN also remains committed to enhancing shareholders’ value.
Hawkins, carrying a Zacks Rank #3, has expected earnings growth of 26.2% for the current fiscal year. The Zacks Consensus Estimate for HWKN’s earnings for the current fiscal has been stable over the last 60 days. The company also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 30.6%.
Price and Consensus: HWKN