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4 Stocks to Watch From the Rebounding Chemical Specialty Industry

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The Zacks Chemicals Specialty industry has rebounded from the coronavirus-led downturn, thanks to an uptick in demand in key markets including automotive and construction. A recovery in global industrial and manufacturing activities augurs well for the industry.

Industry players like Element Solutions Inc (ESI - Free Report) , Minerals Technologies Inc. (MTX - Free Report) , AdvanSix Inc. (ASIX - Free Report) and Hawkins, Inc. (HWKN - Free Report) are poised to benefit from the demand upturn. 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, speciality 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 combination of molecules referred to as formulations, and they provide a vast range of effects on which various industries rely upon. 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?

Revival in End-market Demand: Companies in the chemical specialty space faced the heat from subdued demand across certain major industries — including construction and automotive — for much of the first half of 2020 in the wake of the pandemic. Shutdowns and travel restrictions to blunt the spread of infection put a brake on industrial and economic activities globally, sapping demand for specialty chemicals. However, with the reopening of the major economies around the world, demand for specialty chemicals has started to pick up on a rebound in global industrial and manufacturing activities. The automotive sector has made a speedy recovery following the pandemic-led slump on the back of a strong rebound in customer demand for new vehicles. Moreover, the construction sector has recovered on the resumption of projects that were stalled earlier partly due to supply chain disruptions. Residential construction is picking up around the world, supported by lower interest rates. Notably, the U.S. housing sector has witnessed a recovery, backed by record-low borrowing costs and higher demand for new properties due to the rising trend of work from home in the wake of the pandemic. As these major markets recover, demand for specialty chemicals is expected to go up.

Strategic 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 balance sheet and boost cash flows — in a bid to stay afloat amid the pandemic-induced headwinds. Notably, the industry participants — including Celanese Corporation (CE - Free Report) and Ecolab Inc. (ECL - Free Report) — are aggressively implementing actions to cut costs. The measures are likely to help the companies sail through the ongoing challenges.

Input Cost Pressure a Concern: Specialty chemical makers face headwinds from a short supply of raw materials as a result of coronavirus. The closure of a large number of factories to stem the spread of the outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the chemical specialty industry and pushed up prices of these inputs. Some of the companies are also facing challenges from elevated logistics costs. The devastating winter storm in the U.S. Gulf Coast also disrupted the supply of feedstocks. Some lingering impacts of the disruptions are expected to continue over the short haul. As such, the raw material supply disruption is likely to continue to affect 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 #99, which places it at the top 39% 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 Underperforms S&P 500 & Sector

The Zacks Chemicals Specialty industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.

The industry has gained 21.7% over this period compared with the S&P 500’s rise of 34.4% and the broader sector’s increase of 31.3%.

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 25.44X, above the S&P 500’s 15.62X and the sector’s 6.42X.

Over the past five years, the industry has traded as high as 37.53X, as low as 14.94X, with a median of 23.53X, 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

AdvanSix: New Jersey-based AdvanSix is a manufacturer of nylon 6 resin, chemical intermediates and ammonium sulfate fertilizer. The company is expected to benefit from improved end-market conditions and growth of its differentiated products. It is seeing a recovery in demand across a number of markets including automotive, building & construction, electronics and packaging. Higher demand is expected to drive its volumes. Strong agricultural industry fundamentals also bode well.

The company, sporting a Zacks Rank #1 (Strong Buy), has expected earnings growth of 160.4% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 34.7% upward over the last 60 days. The company beat the Zacks Consensus Estimate in each of the trailing four quarters at an average of 50.7%. Moreover, its shares have soared around 168% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: ASIX

 

 

Hawkins: The Minnesota-based company is a manufacturer and distributor of various industrial chemicals and reagent grade laboratory chemicals. It is seeing strong growth in its Water Treatment unit riding on strength across pools, resort and fitness center end markets. Acquisitions of ADC and C&L Aqua are also contributing to its performance. Higher demand for health and immunity products is driving its Health and Nutrition segment. The company’s Industrial segment is also benefiting from higher sales of agricultural, pharmaceutical and food ingredient products.

Hawkins, carrying a Zacks Rank #1, has expected earnings growth of 24.9% for the current fiscal year. Moreover, the consensus estimate for earnings for the current fiscal has been revised 19.9% upward over the last 60 days. The company also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 25.7%. Its shares have also gained around 24% over the past year.

Price and Consensus: HWKN

 

 

Minerals Technologies: The New York-based company, carrying a Zacks Rank #2 (Buy), develops and markets a vast range of specialty mineral, mineral-based and synthetic mineral products and related systems and services. It should gain from its global growth initiatives and efforts to improve its balance sheet. The recent buyout of Normerica also bolsters its position in the North America cat litter market. Strong end-market demand along with new product development, cost control, productivity improvements and pricing initiatives will also support its performance.

The company has expected earnings growth of 25.3% for the current year. Moreover, the Zacks Consensus Estimate for current-year earnings has been revised 0.8% upward over the last 60 days. The company beat the Zacks Consensus Estimate in each of the trailing four quarters at an average of 7.7%. Its shares have also rallied around 51% over a year.

Price and Consensus: MTX

 

 

Element Solutions: Based in Florida, Element Solutions is a leading specialty chemicals provider offering innovative and differentiated solutions to its customers across a vast spectrum of industries. It is expected to gain from healthy demand in its high-end electronics business and a strong rebound in the automotive industry. The company also remains focused on growing through strategic acquisitions. It is implementing a number of cost-containment measures including reduction of traveling costs. These actions are likely to lend support to its margins.

The company, carrying a Zacks Rank #2, has expected earnings growth of 43.8% for the current year. The consensus estimate for earnings for the current year has also been revised 1.5% upward over the last 60 days. The company surpassed the Zacks Consensus Estimate in three of the trailing four quarters at an average rate of 7.1%. Its shares have also surged roughly 112% over a year.

Price and Consensus: ESI