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4 Stocks to Buy From the Prospering Diversified Chemical Industry

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The Zacks Chemicals Diversified industry has recovered after bearing the brunt of the coronavirus fallout. A strong revival in demand in major end markets from the pandemic-led lows and an upturn in manufacturing and industrial activities globally have put the wind back in the sails of the industry.

Albemarle Corporation (ALB - Free Report) , Tronox Holdings plc (TROX - Free Report) , Stepan Company (SCL - Free Report) and Kronos Worldwide, Inc. (KRO - Free Report) are well placed to benefit from the rebound in demand. Strategic measures, including reduction of operating costs, are also helping these companies to navigate a still-challenging environment.


About the Industry

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 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, specialty polymers and coating additives 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.

What's Shaping the Future of the Chemicals Diversified Industry?

Strong End-Market Demand Buoy Prospects: Lockdowns and restrictions by governments around the world, in response to the pandemic, halted industrial activities through the first half of 2020 and gutted demand for chemicals in the key end-use markets, including automotive, construction and electronics. However, chemical demand started to pick up from the third quarter of 2020 on the return of global economic activities, and the recovery continued through 2021. The uptick in demand is being driven by a rebound in manufacturing and industrial activities globally. The automotive industry has rebounded following the virus-led slump riding on pent-up demand and the shift toward private transportation. Despite the semiconductor crunch, diversified chemical companies are seeing higher demand from the automotive market. The construction sector has also bounced back on the resumption of many projects, with strength particularly being witnessed in residential construction. A recovery in demand is also being witnessed across the aerospace and energy markets. As major end-use markets recover, demand for chemicals is expected to go up, thereby driving sales volumes and top lines of chemical diversified companies.

Strategic Actions to Drive Results: The companies in this space are taking a host of strategic measures, including cost-cutting and productivity improvement, operational efficiency improvement and actions to strengthen the balance sheet and boost cash flows. In particular, the industry participants are aggressively implementing actions to bring down costs, which include the reduction of discretionary spending and traveling expenses. Some of the industry players are raising selling prices to counter raw material and logistics cost inflation. These moves are likely to help the industry in sustaining margins amid pandemic-induced challenges.

Higher Input and Logistics Costs Pose Margin Headwinds: The industry players are exposed to cost pressure associated with raw materials resulting from short supply due to coronavirus and weather-related events. These companies also face challenges arising from higher supply chain and logistics costs. The disruption in the supply chain has pushed up the prices of inputs. The devastating winter storm in the U.S. Gulf Coast disrupted the supply of feedstocks. Shutdowns associated with Hurricane Ida also further squeezed the supply of raw materials. The lingering impacts of supply chain and logistic bottlenecks are expected to continue over the short term. The rapid spread of the Omicron variant of coronavirus also threatens to exacerbate pressure on the already strained global supply chain. Higher raw material and logistics costs are, thus, likely to hurt the margins of diversified chemical companies over the short term.

Zacks Industry Rank Indicates Upbeat Prospects

The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #105, which places it at the top 41% 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

The Zacks Chemicals Diversified industry has underperformed the Zacks S&P 500 composite over the past year while outperforming the broader Zacks Basic Materials sector over the same period.

The industry has gained 9.8% over this period compared with the S&P 500’s rise of 24.6% and the broader sector’s growth of 5.3%.

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 9.32X, below the S&P 500’s 15.7X and above the sector’s 6.25X.

Over the past five years, the industry has traded as high as 13.12X, as low as 5.19X and at the median of 7.99, as the chart below shows.

 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 

 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 

4 Chemicals Diversified Stocks to Keep a Close Eye on

Albemarle: North Carolina-based Albemarle is a premier specialty chemicals company with leading positions in attractive end markets globally. It is benefiting from higher volumes in its lithium business on continued recovery in global economic activities. Healthy customer orders and plant productivity improvements are supporting volumes. Higher lithium prices due to tight market conditions are also supporting its performance. Its bromine business is also gaining from higher demand, a rebound in certain end markets, higher pricing and cost-saving actions. ALB is seeing strong demand for flame retardants. The company is also strategically executing its projects aimed at boosting its global lithium derivative capacity. It remains focused on investing in high-return projects to drive productivity. Albemarle is also benefiting from cost-saving and productivity initiatives.

Albemarle, currently sporting a Zacks Rank #1 (Strong Buy), has an expected earnings growth rate of 51.3% for the current year. The Zacks Consensus Estimate for ALB’s current-year earnings has been revised 5.4% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 22.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Price and Consensus: ALB

 

 

Tronox: Based in Connecticut, Tronox is a leading producer of high-quality titanium products, including titanium dioxide (TiO2) pigment. It is benefiting from higher sales volumes of TiO2 and zircon. Higher customer demand on the back of the ongoing economic recovery is supporting volume growth. Higher TiO2 and zircon prices are also aiding its performance. TROX's regional pricing initiatives are contributing to pricing gains.

Tronox, flaunting a Zacks Rank #1, has an expected earnings growth rate of 18.8% for the current year. The consensus estimate for TROX's current-year earnings has been revised 4.5% upward over the last 60 days. The company beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missed once. It has a trailing four-quarter earnings surprise of roughly 15.5%, on average.

Price and Consensus: TROX

 

 

Kronos Worldwide: Texas-based Kronos, carrying a Zacks Rank #1, is a leading international producer of TiO2 products. It is benefiting from higher demand for TiO2. Healthy demand in European and North American markets is likely to drive its TiO2 sales volumes. KRO is also gaining from an uptick in TiO2 selling prices, supported by strong consumer demand and rising costs. New product development, a solid customer base and effective marketing strategies are also working in the company’s favor.

Kronos has an expected earnings growth rate of 28.9% for the current year. The Zacks Consensus Estimate for KRO's current-year earnings has been revised 28.9% upward over the last 60 days.

 

Price and Consensus: KRO

 

 

Stepan: Illinois-based Stepan is a leading producer of specialty and intermediate chemicals used in a broad range of industries. It is seeing higher demand for Surfactants in the agricultural and oilfield markets and increasing institutional cleaning volumes on the back of the reopening of economies globally. The acquisition of INVISTA's aromatic polyester polyol business is also driving volumes in its Polymer business. The business is also benefiting from a rebound from pandemic-related delays of re-roofing and new construction projects. SCL also remains committed to boosting shareholder value through disciplined capital allocation leveraging a strong balance sheet. It is also benefiting from actions to improve operational productivity, boost capacity and raise prices to offset inflationary pressures.

Stepan, carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 14.5% for the current year. The Zacks Consensus Estimate for SCL's earnings for the current year has been revised 0.4% upward over the last 60 days. The company beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missed once. It has a trailing four-quarter earnings surprise of roughly 17.5%, on average.

 

Price and Consensus: SCL