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) , DuPont de Nemours, Inc. (DD - Free Report) , LyondellBasell Industries N.V. (LYB - Free Report) , Eastman Chemical Company (EMN - Free Report) , PPG Industries, Inc. (PPG - Free Report) and Albemarle Corporation (ALB - Free Report) .
Here are the industry’s three major themes:
- The diversified chemical industry is reeling under the effects of a significant downturn in demand across major markets such as automotive, construction and industrial amid the coronavirus pandemic. Shutdowns and restrictions to curb the spread of infection have paralyzed industrial activities globally, leading to a slump in demand for chemicals. Activities in the construction space have also suffered due to the deferral of projects. The automotive industry has also been hammered by the outbreak which pummelled demand and put a brake on production due to supply chain disruptions and manpower shortage. A sharp decline in crude oil prices has also hurt the demand for chemicals in the energy space. The difficult demand environment is expected to persist in the near term amid a slowdown in business activities globally.
- Companies in this space are exposed to cost pressure associated with raw materials resulting from short supply due to coronavirus. The shutdown of a large number of factories across China has disrupted the supply of certain key raw materials used in chemical production. This has in turn pushed up prices of the inputs. Some of the companies are also exposed to the challenges arising from higher logistics costs. Lower crude oil prices are also hurting the selling prices of a number of players in this space. Higher input costs and lower prices are likely to exert pressure on margins of these companies over the near term.
- 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 Grim Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #197, which places it at the bottom 22% 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 gloomy 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for the current year has gone down 52.1%.
Despite the industry’s bleak near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
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 6.4% over this period compared with the S&P 500’s rise of 17.5% and the broader sector’s growth of 12.2%.
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 8.46X, below the S&P 500’s 12.55X and the sector’s 10.9X.
Over the past five years, the industry has traded as high as 13.12X, as low as 5.24X and at the median of 7.49X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Diversified chemical companies are grappling with demand slowdown across major end-use markets. Margins of these companies are also likely to remain under pressure over the short term due to raw material cost inflation and weak selling prices. The industry is also bearing the brunt of hefty trade tariffs.
We are presenting one stock with a Zacks Rank #1 (Strong Buy) that is well positioned for growth. There are also three stocks with a Zacks Rank #3 (Hold) that investors may hold on to for now. You can see the complete list of today’s Zacks #1 Rank stocks here.
Stepan Company (SCL - Free Report) : The Illinois-based company, sporting a Zacks Rank #1, has an expected earnings growth of 1.6% for the current year. The Zacks Consensus Estimate for current-year earnings has gone up 15% in the last 60 days.
Price and Consensus: SCL
FMC Corporation (FMC - Free Report) : The Pennsylvania-based company, carrying a Zacks Rank #3, has expected earnings growth of 4.9% for the current year. The company also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters by 9.6%, on average.
Price and Consensus: FMC
Compass Minerals International, Inc. (CMP - Free Report) : The Kansas-based company, carrying a Zacks Rank #3, has expected earnings growth of 51% for the current year. The company also delivered an average earnings surprise of 25.6% over the trailing four quarters.
Price and Consensus: CMP
Air Products and Chemicals, Inc. (APD - Free Report) : The Pennsylvania-based company, carrying a Zacks Rank #3, has an expected earnings growth of 2.2% for the current fiscal year. The company also has an estimated long-term earnings growth rate of 8.8%.
Price and Consensus: APD