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4 Diversified Chemical Stocks to Escape Industry Challenges
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The Zacks Chemicals Diversified industry is bearing the brunt of a spike in raw material costs as well as higher supply-chain, energy and logistics costs, made worse by the Russia-Ukraine conflict. Weakness in certain markets, COVID-related impacts in China and the slowdown in Europe may also impact demand for chemicals.
Industry players like Air Products and Chemicals, Inc. (APD - Free Report) , DuPont de Nemours, Inc. (DD - Free Report) , Albemarle Corporation (ALB - Free Report) and Cabot Corporation (CBT - Free Report) are banking on strategic measures, including operating cost reductions and aggressive price hikes to tide over the 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?
Demand Worries From End-market Weakness, China Slowdown: Companies in the chemical-diversified space are facing headwinds from a slowdown in certain key markets. The semiconductor shortage has led to reduced automotive builds around the world, curbing chemical demand in this major market. The Russia-Ukraine conflict has triggered a fresh round of global microchip shortage. Both these countries are major suppliers of raw materials required for global semiconductor production. The chip crisis is unlikely to abate anytime soon, given the impact of the war. The sluggishness in the building & construction market and customer destocking in consumer durables are other concerns. Also, the slowdown in economic activities in China due to the restrictions following a resurgence in COVID-19 infections is hurting chemical demand. The softness in China has resulted in a higher level of near-term economic uncertainty, which may continue to affect chemical volumes over the near term.
Higher Input Costs Pose Margin Headwinds: The industry players are exposed to cost pressure associated with raw materials resulting from short supply. 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. Russia's invasion of Ukraine and new government-mandated lockdowns in China have also put more pressure on the global supply chain. These companies are also facing headwinds from higher energy costs, especially in Europe, which has witnessed a significant spike in costs amid the ongoing war in Ukraine. The lingering impacts of these bottlenecks are expected to continue over the short term. Higher raw material, energy and logistics costs are, thus, likely to hurt the margins of diversified chemical companies.
Strategic Actions to Aid 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. These include the reduction of discretionary spending and traveling expenses. The industry players are also raising selling prices to counter raw material and logistics cost inflation. These moves are likely to help the industry in sustaining margins amid the prevailing challenges.
Zacks Industry Rank Indicates Downbeat Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #198, which places it at the bottom 21% 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 bleak near-term prospects. 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 Diversified 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 14.1% over this period compared with the S&P 500’s decline of 7.9% and the broader sector’s decline of 6.7%.
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 9.16X, below the S&P 500’s 12.09X and above the sector’s 7.84X.
Over the past five years, the industry has traded as high as 12.80X, as low as 5.89X and at the median of 8.45, 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
Air Products: Based in Pennsylvania, Air Products is a leading industrial gases company. It is benefiting from investments in high-return projects, new business deals, acquisitions and productivity initiatives. It remains committed to its gasification strategy and is executing its growth projects. These projects are expected to be accretive to earnings and cash flows.
Air Products is also boosting productivity to improve its cost structure. APD is seeing the positive impacts of its productivity actions. Benefits from additional productivity and cost improvement programs are likely to support its margins. Air Products also has been benefiting from higher pricing. Higher merchant demand is also driving its volumes.
Air Products, a Zacks Rank #3 (Hold) stock, has expected earnings growth of 9.4% for the current fiscal year. APD beat the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 0.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: APD
DuPont: Delaware-based DuPont provides technology-based materials and solutions to markets including electronics, transportation, construction, water and healthcare. DuPont is benefiting from strong demand in water solutions. Healthy demand in industrial end-markets including aerospace and healthcare is also likely to aid its performance.
The company is also expected to gain from its productivity and pricing actions. It continues to implement strategic price increases to offset raw material and energy cost inflation. These actions are likely to support its margins. DD remains focused on driving growth through innovation and new product development. Its innovation-driven investment is focused on several high-growth areas. It remains committed to driving returns from its R&D investment.
DuPont, carrying a Zacks Rank #3, has a projected earnings growth rate of around 10% for the current year. DD also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 13.8%.
Price and Consensus: DD
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. 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 gaining from higher demand, a rebound in certain end markets, higher pricing and cost-saving actions.
ALB 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 carrying a Zacks Rank #3, has expected earnings growth of 34.1% for the current year. ALB has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 15.7%.
Price and Consensus: ALB
Cabot: Massachusetts-based Cabot is a global specialty chemicals and performance materials company. It is expected to benefit from an uptick in volumes following the end of consumer destocking. Improved volumes, favorable pricing and customer agreements are likely to drive results in its Reinforcement Materials segment. Its Performance Chemicals unit is also expected to gain from demand growth in battery materials and inkjet applications and higher volumes.
Cabot, currently carrying a Zacks Rank #3, has expected earnings growth of 2.2% for the current fiscal year. CBT has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 10.2%.
Price and Consensus: CBT
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4 Diversified Chemical Stocks to Escape Industry Challenges
The Zacks Chemicals Diversified industry is bearing the brunt of a spike in raw material costs as well as higher supply-chain, energy and logistics costs, made worse by the Russia-Ukraine conflict. Weakness in certain markets, COVID-related impacts in China and the slowdown in Europe may also impact demand for chemicals.
Industry players like Air Products and Chemicals, Inc. (APD - Free Report) , DuPont de Nemours, Inc. (DD - Free Report) , Albemarle Corporation (ALB - Free Report) and Cabot Corporation (CBT - Free Report) are banking on strategic measures, including operating cost reductions and aggressive price hikes to tide over the 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?
Demand Worries From End-market Weakness, China Slowdown: Companies in the chemical-diversified space are facing headwinds from a slowdown in certain key markets. The semiconductor shortage has led to reduced automotive builds around the world, curbing chemical demand in this major market. The Russia-Ukraine conflict has triggered a fresh round of global microchip shortage. Both these countries are major suppliers of raw materials required for global semiconductor production. The chip crisis is unlikely to abate anytime soon, given the impact of the war. The sluggishness in the building & construction market and customer destocking in consumer durables are other concerns. Also, the slowdown in economic activities in China due to the restrictions following a resurgence in COVID-19 infections is hurting chemical demand. The softness in China has resulted in a higher level of near-term economic uncertainty, which may continue to affect chemical volumes over the near term.
Higher Input Costs Pose Margin Headwinds: The industry players are exposed to cost pressure associated with raw materials resulting from short supply. 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. Russia's invasion of Ukraine and new government-mandated lockdowns in China have also put more pressure on the global supply chain. These companies are also facing headwinds from higher energy costs, especially in Europe, which has witnessed a significant spike in costs amid the ongoing war in Ukraine. The lingering impacts of these bottlenecks are expected to continue over the short term. Higher raw material, energy and logistics costs are, thus, likely to hurt the margins of diversified chemical companies.
Strategic Actions to Aid 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. These include the reduction of discretionary spending and traveling expenses. The industry players are also raising selling prices to counter raw material and logistics cost inflation. These moves are likely to help the industry in sustaining margins amid the prevailing challenges.
Zacks Industry Rank Indicates Downbeat Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #198, which places it at the bottom 21% 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 bleak near-term prospects. 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 Diversified 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 14.1% over this period compared with the S&P 500’s decline of 7.9% and the broader sector’s decline of 6.7%.
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 9.16X, below the S&P 500’s 12.09X and above the sector’s 7.84X.
Over the past five years, the industry has traded as high as 12.80X, as low as 5.89X and at the median of 8.45, 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
Air Products: Based in Pennsylvania, Air Products is a leading industrial gases company. It is benefiting from investments in high-return projects, new business deals, acquisitions and productivity initiatives. It remains committed to its gasification strategy and is executing its growth projects. These projects are expected to be accretive to earnings and cash flows.
Air Products is also boosting productivity to improve its cost structure. APD is seeing the positive impacts of its productivity actions. Benefits from additional productivity and cost improvement programs are likely to support its margins. Air Products also has been benefiting from higher pricing. Higher merchant demand is also driving its volumes.
Air Products, a Zacks Rank #3 (Hold) stock, has expected earnings growth of 9.4% for the current fiscal year. APD beat the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 0.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: APD
DuPont: Delaware-based DuPont provides technology-based materials and solutions to markets including electronics, transportation, construction, water and healthcare. DuPont is benefiting from strong demand in water solutions. Healthy demand in industrial end-markets including aerospace and healthcare is also likely to aid its performance.
The company is also expected to gain from its productivity and pricing actions. It continues to implement strategic price increases to offset raw material and energy cost inflation. These actions are likely to support its margins. DD remains focused on driving growth through innovation and new product development. Its innovation-driven investment is focused on several high-growth areas. It remains committed to driving returns from its R&D investment.
DuPont, carrying a Zacks Rank #3, has a projected earnings growth rate of around 10% for the current year. DD also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 13.8%.
Price and Consensus: DD
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. 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 gaining from higher demand, a rebound in certain end markets, higher pricing and cost-saving actions.
ALB 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 carrying a Zacks Rank #3, has expected earnings growth of 34.1% for the current year. ALB has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 15.7%.
Price and Consensus: ALB
Cabot: Massachusetts-based Cabot is a global specialty chemicals and performance materials company. It is expected to benefit from an uptick in volumes following the end of consumer destocking. Improved volumes, favorable pricing and customer agreements are likely to drive results in its Reinforcement Materials segment. Its Performance Chemicals unit is also expected to gain from demand growth in battery materials and inkjet applications and higher volumes.
Cabot, currently carrying a Zacks Rank #3, has expected earnings growth of 2.2% for the current fiscal year. CBT has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 10.2%.
Price and Consensus: CBT