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Near-Term Prospects Gloomy for Chemical Plastics Stocks

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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 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.

Here are the industry’s three major themes:

  • Chemical plastics makers are hamstrung by trade frictions between the United States and China. Washington and Beijing levied 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 plastic products. China is one of the biggest export markets for U.S. chemicals and plastics. Beijing’s countermeasures have created an uncertain demand environment for U.S. chemical products in China. The tariffs are hurting U.S. chemical exports and the competitiveness of the American chemical industry. Trade tensions have also led to a slowdown in industrial activities across Asia and Europe, hurting demand for chemicals and plastics.
     
  • Companies in this space are exposed to margin pressure from higher raw materials costs as a result of short supply, partly due to production outages and plant shutdowns. The stricter environmental policy in China 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 the prices of inputs. Some of the players are also exposed to challenges from elevated logistics costs. Nevertheless, strategic measures including cost-cutting and productivity improvement and actions to raise selling prices should help these companies counter the headwinds from cost inflation.
     
  • The U.S. chemical plastic industry continues to reap the benefits of abundant and cheap ethane feedstock extracted from shale gas. The shale bounty has provided U.S. plastic 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 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 should boost capacity and export.
     

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Chemicals Plastics industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #239, which places it at the bottom 7% 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 gloomy 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 36.5%.

Before we present a few chemical plastics 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 Plastics 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 45.3% over this period compared with the S&P 500’s rise of 4.3% and broader sector’s fall of 18.9%.

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 4.93X, below the S&P 500’s 10.86X and the sector’s 7.74X.

Over the past five years, the industry has traded as high as 10.67X, as low as 3.90X, with a median of 6.12X, as the chart below shows.


Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 




 

Bottom Line

Trade war between the United States and China pose as headwind to the industry. Moreover, margins of the companies in this space will remain under pressure amid an inflationary environment given the raw material cost inflation.

Nevertheless, strategic actions including continued focus on cost and productivity, and expansion of scale through acquisitions should keep them afloat over the short haul. U.S. plastic makers should also continue to enjoy the advantage of access to abundant and affordable shale gas feedstock.

We are presenting one stock with a Zacks Rank #2 (Buy) that is poised to grow in the prevailing environment. There are also a couple of 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.

Kuraray Co., Ltd. (KURRY - Free Report) : The Japan-based company, carrying a Zacks Rank #2, has an expected earnings growth of 13.2% for the current year. The consensus EPS estimate has moved 1.3% higher for the current year, over the last 30 days.

Price: KURRY



 

Trinseo S.A. (TSE - Free Report) : The Pennsylvania-based company currently carries a Zacks Rank #3. The company delivered an average positive earnings surprise of 6.6% in the trailing four quarters. It also has an estimated long-term earnings growth rate of 12%, higher than the industry average of 10.1%.

Price: TSE



 

JSR Corporation (JSCPY - Free Report) : This Japan-based company currently carries a Zacks Rank #3. It has an expected earnings growth of 7.5% for the current fiscal year. The Zacks Consensus Estimate for earnings for the current fiscal year has remained stable in the last 30 days.

Price: JSCPY

 

 

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