Chemicals Plastics industry has staged a strong rebound on the back of a recovery in industrial demand. The uptick in demand across major end-use industries such as automotive, tire and construction from the coronavirus-led slump bodes well for the industry. Covestro AG ( COVTY Quick Quote COVTY - Free Report) , Westlake Chemical Corporation ( WLK Quick Quote WLK - Free Report) , JSR Corporation ( JSCPY Quick Quote JSCPY - Free Report) and Trinseo S.A. ( TSE Quick Quote 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. Moreover, the shale boom is 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.
What’s Shaping the Future of the Chemical Plastics Industry? 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. Weaker demand coupled with a sharp decline in oil prices also exerted pressure on the product prices of chemical plastics makers. However, demand started to pick up from the third quarter with a rebound in industrial and manufacturing activities globally from the pandemic-induced slowdown. Notably, demand for PVC resin is strengthening with the revival in the construction sector, following easing of lockdowns and restrictions. Moreover, an accelerated recovery in the automotive sector from the virus-led slump augurs well for demand for polyethylene — the most widely consumed polymer globally — in this major market. Demand has also picked up in tire applications. Meanwhile, demand for polyethylene 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. Strong Rebound in End-market Demand: 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 particular, the industry participants are aggressively implementing actions to whittle down costs, 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. Self-help Actions to Support Margins: 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. Shale Bounty Driving Capacity Expansion: 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 #3, which places it at the top 1% 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 Tops Sector and S&P 500
The Zacks Chemicals Plastics 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 60.3% over this period compared with the S&P 500’s rise of 26.9% and the broader sector’s increase of 45%. 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 11.86X, below the S&P 500’s 17.38X but above the sector’s 11.45X.
Over the past five years, the industry has traded as high as 11.87X, as low as 3.62X, with a median of 7.06X, as the chart below shows. Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 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 117% for the current year. The Zacks Consensus Estimate for the current year has been revised 60.8% upward over the last 60 days. The stock has also gained roughly 37% over the over the past six months. 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 recently announced acquisition of Arkema’s polymethyl methacrylates and activated methyl methacrylates businesses will allow the company to transform to a higher-margin, less-cyclical solutions provider. The buyout is also expected to deliver meaningful cost synergies and IT-related productivity savings. The company, carrying a Zacks Rank #1, has expected earnings growth of 144.4% for the current year. The consensus estimate for the current year has been revised 37.6% upward over the last 60 days. The stock has also shot up roughly 147% over the past six months. Price: TSE
JSR: The Japan-based company engages in the manufacture and sale of synthetic rubber and chemical materials. The company is expected to benefit from its strategic moves including actions to expand its business in growth areas and reduce business costs amid a still-challenging environment. A strong rebound in automotive production and the underlying strength in the semiconductor market should also drive its results. The company is seeing higher volumes for semiconductor materials. The strength in semiconductors is underpinned by the expansion of infrastructure and device demand from digitization. The company, sporting a Zacks Rank #1, has an expected earnings growth rate of 16.8% for the current fiscal year. The consensus estimate for the current fiscal has been revised 18.1% upward over the last 60 days. The stock has also rallied roughly 48% over the past six months. Price: JSCPY
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 announced acquisition of Royal DSM’s Resins & Functional Materials business will also expand the company’s portfolio in the attractive growth market for sustainable coating resins and provide considerable synergies. Covestro currently carries a Zacks Rank #2 (Buy). It has expected earnings growth of 72.5% for the current year. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 36.1% upward over the last 60 days. The company has also seen its shares rally roughly 46% over the past six months. Price: COVTY