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-use 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, surfactants, speciality polymers, coating additives and oilfield chemicals 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.
Here are the three major themes in the industry:
- The diversified chemical industry is among the industries that have been badly hit by the bitter year-long trade conflict between the United States and China. Washington and Beijing slapped billions of dollars in punitive tariffs on each others’ products last year. China’s list of U.S. goods hit with tariffs includes an array of chemicals. Although recent negotiations between the world’s two biggest economies have raised hopes of a possible resolution of the trade dispute, the tariffs currently in place are already doing damage to this space. Notably, China is one of the biggest export markets for U.S. chemicals and, thus, leaves the American chemical industry heavily exposed to Beijing’s countermeasures. The trade tariffs have created an uncertain demand environment for U.S. chemical products in China.
- Companies in this space are exposed to headwinds from raw material cost inflation as a result of short supply, partly due to production outages and plant shutdowns. China’s environmental crackdown has led to tightening in the supply of certain key raw materials as a result of plant closures. The disruption in the supply chain has pushed up prices of these inputs. Some companies are also exposed to challenges from elevated logistics costs. Nevertheless, these players remain focused on countering the challenges through strategic actions including productivity improvement, capacity expansion, price hike initiatives and expansion of scale through acquisitions. Such actions should help them alleviate any pressure on margin.
- U.S. chemical makers are spending heavily on chemical production projects to beef up capacity. The shale gas revolution in the United States has been a huge driving force behind chemical investments in plants and equipment in the country. The shale boom has provided U.S. chemical producers a compelling cost advantage over their global counterparts and incentivized a number of companies to plough billions of dollars for setting up facilities (crackers) in the United States to produce key feedstocks like ethylene and propylene in a cost-effective way. Such investments are expected to boost capacity and export. However, there is also concern that the trade tariffs currently in place may dampen new chemical investment in the United States.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #210, which places it at the bottom 18% 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for the current year has gone down 11.3%.
Before we present a few diversified chemical stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags Sector and S&P 500
The Zacks Chemicals Diversified industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials Sector over the past year.
The industry has declined 16.1% over this period compared with the S&P 500’s rise of 4.8% and broader sector’s fall of 11.1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of 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 8.67X, below the S&P 500’s 10.99X. However, it is ahead of the sector’s trailing-12-month EV/EBITDA of 8.12X.
Over the past five years, the industry has traded as high as 19.96X, as low as 6.18X and at the median of 8.92X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
The damaging impact of the U.S.-China trade conflict pose as headwinds to the diversified chemical industry. Moreover, margins of the companies in this space will remain under pressure in an inflationary environment given the spike in input costs.
Nonetheless, strategic actions including expansion of scale through acquisitions, operational efficiency improvement, capacity expansion and continued focus on cost and productivity should keep them afloat over the neat term.
Here, we present one stock sporting a Zacks Rank #1 (Strong Buy) that is well positioned to gain amid the prevailing challenges. There are also three stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
Innospec Inc. : The Colorado-based company, sporting a Zacks Rank #1, has an expected earnings growth of 3.5% for the current year. The company also delivered an average positive earnings surprise of 8% in the trailing four quarters.
Price and Consensus: IOSP
Albemarle Corporation (ALB - Free Report) : The North Carolina-based company currently carries a Zacks Rank #3. It has an expected earnings growth of 12.6% for the current year. The company delivered an average positive earnings surprise of 6% in the trailing four quarters. It has an estimated long-term earnings growth rate of 15.1%.
Price and Consensus: ALB
PPG Industries, Inc. (PPG - Free Report) : The Pennsylvania-based company has a Zacks Rank #3. The Zacks Consensus Estimate for earnings for the current year indicates year-over-year growth of 5.1%. The company also has an estimated long-term earnings growth rate of 8.5%.
Price and Consensus: PPG
Air Products and Chemicals, Inc. (APD - Free Report) : The Pennsylvania-based company, carrying a Zacks Rank #3, has an expected earnings growth of 9.8% for the current fiscal year. The company also has an estimated long-term earnings growth rate of 13%.
Price and Consensus: APD