Chemicals Plastics industry is riding on the back of strong industrial demand, driven by global economic expansion. The uptick in demand across major end-use industries such as automotive, tire and building & construction from the coronavirus-led slump augurs well for the industry. Westlake Chemical Corporation ( WLK Quick Quote WLK - Free Report) and Covestro AG ( COVTY Quick Quote COVTY - Free Report) are well placed to benefit from the strong demand dynamics. Self-help measures, including reduction of operating costs, are also helping these companies to offset the pandemic-driven headwinds. The shale boom, too, 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. Building & construction is a major market for PVC. Automotive is an important consuming sector of polyethylene and polypropylene with several applications, including bumpers, batteries, interior linings, seats and different types of tanks. Polyethylene is also widely used in the packaging market for applications in films, bags, bottles and other packaging materials.
What's Shaping the Future of the Chemical Plastics Industry?
Coronavirus led to a downturn in industrial activities globally for much of the first half of 2020, sapping demand for plastics in key end-use markets including automotive, tire, construction and textile. However, demand started to pick up from the third quarter of 2020 with a rebound in industrial and manufacturing activities globally from the pandemic-induced slowdown. Demand for PVC resin is strengthening with the revival in the construction sector, following the easing of lockdowns and restrictions. The strength in the residential construction market is driving demand for PVC globally. Demand for polyethylene — the most widely consumed polymer globally — also remains strong in consumer product packaging, automotive, healthcare and tire applications. 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. Demand Strength in Major End-markets: 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 order to whittle down costs, the industry participants are aggressively implementing actions, which include reducing discretionary spending and traveling expenses, furloughs and salary cuts. These companies are also taking price hike measures to counter a spike in raw material costs due to the supply-chain disruptions. These moves are likely to help the industry in sustaining margins amid the prevailing challenges. Self-help Actions to Drive 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 plow 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 Boom Fueling 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 #58, which places it at the top 23% 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 Outperforms Sector and S&P 500
The Zacks Chemicals Plastics industry has outperformed the broader Zacks Basic Materials sector and the Zacks S&P 500 composite in the past year.
The industry has gained 41.4% against the S&P 500’s rise of 32.5% and the broader sector’s growth of 18.6%.
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 4.31X, below the S&P 500’s 15.75X and the sector’s 6X.
Over the past five years, the industry has traded as high as 11.71X, as low as 3.84X, with a median of 7.69X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
2 Chemical Plastics Stocks to Keep a Close Eye on
Westlake Chemical: Texas-based Westlake Chemical, sporting a Zacks Rank #1 (Strong Buy), is a vertically integrated international producer and supplier of petrochemicals, polymers and building products. The company is gaining from higher demand in its polyethylene business in specialty applications, especially food packaging, and strength in global demand for PVC resin. WLK is seeing strong demand in the downstream building products business on the back of continued housing growth and spending on repair and remodeling activities. It is also benefiting from its investment in capacity expansion projects, synergies of acquisitions, and actions to improve operating efficiency and reduce costs. These factors have resulted in a share price rally of 36.4% over the past year. Westlake Chemical has expected earnings growth of 543.2% for the current year. The Zacks Consensus Estimate for WLK’s earnings for the current year has been revised 17.8% upward over the last 60 days. Price: WLK
Covestro: Germany-based Covestro, carrying a Zacks Rank #3 (Hold), makes and markets high-quality polymers for various industries worldwide. COVTY is benefiting from a rebound in automotive and construction end-use markets. Its cost-saving actions are also lending support to its margins. The acquisition of Royal DSM’s Resins & Functional Materials business also expands the company’s portfolio in the attractive growth market for sustainable coating resins and provides considerable synergies. These factors have contributed to its share price appreciation of 15.9% over a year. Covestro has expected earnings growth of 238% for the current year. The consensus estimate for COVTY’s current-year earnings has been revised 16.2% upward over the last 60 days. Price: COVTY