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4 Stocks to Buy From the Promising Chemical Specialty Industry
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The Zacks Chemicals Specialty industry is riding on an uptick in demand in key markets including construction, automotive and agriculture. Higher global industrial and manufacturing activities augur well for the industry.
Industry players like Livent Corporation , Daqo New Energy Corp. (DQ - Free Report) , Ingevity Corporation (NGVT - Free Report) and Hawkins, Inc. (HWKN - Free Report) are poised to benefit from robust demand. 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 a 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?
Demand Strength in End Markets: Companies in the chemical specialty space are gaining from higher demand across certain major industries — including construction and automotive. With the reopening of the major economies around the world, demand for specialty chemicals has picked up on an uptick in global industrial and manufacturing activities. Demand from the automotive market remains healthy, despite the semiconductor shortage, which continues to affect automotive builds globally. Automotive OEM production is expected to improve in second-half 2022 with the easing of semiconductor supply shortage and the ramp-up of production in China post lockdowns. Moreover, the construction sector has recovered on the resumption of projects that were stalled earlier partly due to supply chain disruptions. In particular, strength is being witnessed in residential construction globally. Specialty chemical companies are also seeing strong demand in electronics and agriculture end markets. Demand for specialty chemicals is expected to remain healthy in these key markets over the near term.
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 the balance sheet and boost cash flows — in a bid to stay afloat amid the prevailing supply chain and pandemic-induced headwinds. Notably, the industry participants 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 are facing headwinds from raw material cost inflation and supply-chain and freight transportation disruptions. The closure of a large swath of factories to stem the spread of the COVID-19 outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the chemical specialty industry. Some of the companies are also facing challenges from elevated logistics and labor costs. The shipping bottlenecks have led to a surge in freight costs. The Russia-Ukraine conflict and new lockdowns in China following a resurgence in coronavirus infections have increased the pressure on an already-strained global supply chain. The lingering impacts of supply chain and logistic bottlenecks are expected to continue over the short haul and exert pressure on the margins of 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 #71, which places it at the top 28% 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 Sector and S&P 500
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 lost 18% over this period compared with the S&P 500’s decline of 9.4% and the broader sector’s decrease of 10.6%.
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 6.61X, below the S&P 500’s 12.84X and above the sector’s 6.36X.
Over the past five years, the industry has traded as high as 40.85X, as low as 6.12X, with a median of 24.08X, 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
Livent: Pennsylvania-based Livent is a vertically integrated lithium producer. LTHM is benefiting from strong demand and higher lithium pricing, aided by strong market conditions. Lithium demand is being driven by higher electric vehicle (EV) sales and battery installations for EVs. Higher realized pricing is expected to drive the company’s top line and margins. Tight supply-demand conditions are supporting prices.
Livent, carrying a Zacks Rank #1 (Strong Buy), has expected earnings growth of 667% for the current year. The Zacks Consensus Estimate for earnings for the current year for LTHM has been revised 12.2% upward over the last 60 days. The company also surpassed the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 15.7%, on average.
Price and Consensus: LTHM
Daqo New Energy: China-based Daqo New Energy, sporting a Zacks Rank #1, is a leading producer of high-purity polysilicon. Higher polysilicon average selling prices driven by strong demand for solar energy products are expected to boost its sales and margins. DQ’s facilities are running with increased efficiency, which is likely to drive production volumes. The company’s efforts to improve its cost structure should also support its margins. Its energy efficiency efforts and enhanced manufacturing efficiencies are contributing to lower costs. The company is expected to gain from lower production cost aided by improved operational efficiency in its newly-built Phase 4B facility.
Daqo New Energy has expected earnings growth of 177.5% for the current year. The consensus estimate for current-year earnings for DQ has been revised 20.8% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DQ
Hawkins: Minnesota-based Hawkins is a leading specialty chemical and ingredients company that formulates, distributes, blends, and manufactures products for its customers. 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 its manufactured products is driving its Health and Nutrition segment. HWKN’s Industrial segment is also benefiting from higher selling prices for a number of products. The acquisition of NAPCO Chemical also expands its Water Treatment business.
Hawkins, carrying a Zacks Rank #1, has expected earnings growth of 28.3% for the current fiscal year. The Zacks Consensus Estimate for HWKN’s earnings for the current fiscal has been revised 46.3% upward over the last 60 days. It beat the Zacks Consensus Estimate for earnings in three of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 23%, on average.
Price and Consensus: HWKN
Ingevity: South Carolina-based Ingevity is a global producer of high-performance activated carbon materials and specialty chemicals. It is benefiting from higher demand and prices in its industrial specialties and engineered polymers businesses. NGVT is seeing continued recovery in demand for its industrial specialties products from the pandemic-induced slowdown, leading to higher volumes and prices. Ingevity is also taking several actions to expand capacity and drive long-term growth. The acquisition of Ozark Materials will also strengthen the company’s position in the paving construction industry.
Ingevity, carrying a Zacks Rank #2 (Buy), has expected earnings growth of 15.7% for the current year. The consensus estimate for earnings for the current year for NGVT has been revised 1.7% 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 16.3%.
Price and Consensus: NGVT
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4 Stocks to Buy From the Promising Chemical Specialty Industry
The Zacks Chemicals Specialty industry is riding on an uptick in demand in key markets including construction, automotive and agriculture. Higher global industrial and manufacturing activities augur well for the industry.
Industry players like Livent Corporation , Daqo New Energy Corp. (DQ - Free Report) , Ingevity Corporation (NGVT - Free Report) and Hawkins, Inc. (HWKN - Free Report) are poised to benefit from robust demand. 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 a 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?
Demand Strength in End Markets: Companies in the chemical specialty space are gaining from higher demand across certain major industries — including construction and automotive. With the reopening of the major economies around the world, demand for specialty chemicals has picked up on an uptick in global industrial and manufacturing activities. Demand from the automotive market remains healthy, despite the semiconductor shortage, which continues to affect automotive builds globally. Automotive OEM production is expected to improve in second-half 2022 with the easing of semiconductor supply shortage and the ramp-up of production in China post lockdowns. Moreover, the construction sector has recovered on the resumption of projects that were stalled earlier partly due to supply chain disruptions. In particular, strength is being witnessed in residential construction globally. Specialty chemical companies are also seeing strong demand in electronics and agriculture end markets. Demand for specialty chemicals is expected to remain healthy in these key markets over the near term.
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 the balance sheet and boost cash flows — in a bid to stay afloat amid the prevailing supply chain and pandemic-induced headwinds. Notably, the industry participants 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 are facing headwinds from raw material cost inflation and supply-chain and freight transportation disruptions. The closure of a large swath of factories to stem the spread of the COVID-19 outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the chemical specialty industry. Some of the companies are also facing challenges from elevated logistics and labor costs. The shipping bottlenecks have led to a surge in freight costs. The Russia-Ukraine conflict and new lockdowns in China following a resurgence in coronavirus infections have increased the pressure on an already-strained global supply chain. The lingering impacts of supply chain and logistic bottlenecks are expected to continue over the short haul and exert pressure on the margins of 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 #71, which places it at the top 28% 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 Sector and S&P 500
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 lost 18% over this period compared with the S&P 500’s decline of 9.4% and the broader sector’s decrease of 10.6%.
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 6.61X, below the S&P 500’s 12.84X and above the sector’s 6.36X.
Over the past five years, the industry has traded as high as 40.85X, as low as 6.12X, with a median of 24.08X, 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
Livent: Pennsylvania-based Livent is a vertically integrated lithium producer. LTHM is benefiting from strong demand and higher lithium pricing, aided by strong market conditions. Lithium demand is being driven by higher electric vehicle (EV) sales and battery installations for EVs. Higher realized pricing is expected to drive the company’s top line and margins. Tight supply-demand conditions are supporting prices.
Livent, carrying a Zacks Rank #1 (Strong Buy), has expected earnings growth of 667% for the current year. The Zacks Consensus Estimate for earnings for the current year for LTHM has been revised 12.2% upward over the last 60 days. The company also surpassed the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 15.7%, on average.
Price and Consensus: LTHM
Daqo New Energy: China-based Daqo New Energy, sporting a Zacks Rank #1, is a leading producer of high-purity polysilicon. Higher polysilicon average selling prices driven by strong demand for solar energy products are expected to boost its sales and margins. DQ’s facilities are running with increased efficiency, which is likely to drive production volumes. The company’s efforts to improve its cost structure should also support its margins. Its energy efficiency efforts and enhanced manufacturing efficiencies are contributing to lower costs. The company is expected to gain from lower production cost aided by improved operational efficiency in its newly-built Phase 4B facility.
Daqo New Energy has expected earnings growth of 177.5% for the current year. The consensus estimate for current-year earnings for DQ has been revised 20.8% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DQ
Hawkins: Minnesota-based Hawkins is a leading specialty chemical and ingredients company that formulates, distributes, blends, and manufactures products for its customers. 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 its manufactured products is driving its Health and Nutrition segment. HWKN’s Industrial segment is also benefiting from higher selling prices for a number of products. The acquisition of NAPCO Chemical also expands its Water Treatment business.
Hawkins, carrying a Zacks Rank #1, has expected earnings growth of 28.3% for the current fiscal year. The Zacks Consensus Estimate for HWKN’s earnings for the current fiscal has been revised 46.3% upward over the last 60 days. It beat the Zacks Consensus Estimate for earnings in three of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 23%, on average.
Price and Consensus: HWKN
Ingevity: South Carolina-based Ingevity is a global producer of high-performance activated carbon materials and specialty chemicals. It is benefiting from higher demand and prices in its industrial specialties and engineered polymers businesses. NGVT is seeing continued recovery in demand for its industrial specialties products from the pandemic-induced slowdown, leading to higher volumes and prices. Ingevity is also taking several actions to expand capacity and drive long-term growth. The acquisition of Ozark Materials will also strengthen the company’s position in the paving construction industry.
Ingevity, carrying a Zacks Rank #2 (Buy), has expected earnings growth of 15.7% for the current year. The consensus estimate for earnings for the current year for NGVT has been revised 1.7% 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 16.3%.
Price and Consensus: NGVT