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On Jul 8, we downgraded our recommendation on chemical and advanced materials maker Celanese Corporation (CE - Analyst Report) to Neutral. While we are encouraged by the company’s strategic actions (including acetate capacity expansion) to drive earnings, we are concerned about weak demand for acetyl products.

Why the Downgrade?

Celanese’s first-quarter 2013 adjusted earnings, reported on Apr 18, outpaced the Zacks Consensus Estimate while sales missed. Weakness in the core Acetyl Intermediates segment (roughly 50% of total sales) contributed to a decline in the top line. While Celanese envisions challenging economic conditions to sustain moving ahead, it expects earnings to rise on the back of company-specific initiatives.

Celanese is witnessing weak demand and pricing in its acetyl business. Weak global demand for acetyl products led to a decline in pricing and volume in the Acetyl Intermediates division in the first quarter. Challenging economic conditions in Europe and sluggish growth in Asia may impact the company’s results moving ahead.

Moreover, Celanese is exposed to volatility in raw material costs and currency headwinds. The company’s balance sheet leverage is also relatively high, limiting its financial flexibility.

Nevertheless, Celanese’s strong presence in emerging markets will enable it to deliver incremental earnings in 2013. The company has taken up cost-cutting measures and the necessary steps to run its plants better to counter weak demand.

Celanese is aggressively expanding capacity in the emerging Asian markets. Its expansion initiatives in China are expected to support earnings growth. Celanese’s integrated chemical complex in Nanjing, China, serves as a base for expansion in Asia, supporting the region's increasing demand.

Celanese currently carries a short-term (1 to 3 months) Zacks Rank #3 (Hold).

Other Stocks to Consider

Other companies in the chemical space that are worth considering include Arkema S.A. (ARKAY), Cytec Industries Inc. (CYT - Snapshot Report) and PPG Industries Inc. (PPG - Analyst Report). All of them retain a Zacks Rank #2 (Buy).

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