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Weak Demand to Mar Chemical Plastics Industry's Prospects

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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:
 

  • Companies in the chemical plastics space remain hamstrung by a weak demand environment across a number of key end-use markets including automotive. Global economic weakness and trade issues have led to a slowdown in industrial activities across Asia and Europe, hurting demand for chemicals and plastics. Demand in China, a major consumer, remains sluggish amid a weakening Chinese economy. The automotive market over there has slowed considerably, as reflected by falling car sales. Moreover, disruptions associated with the outbreak of coronavirus are expected to hurt demand in China over the short haul. The deadly outbreak is likely to take a heavy toll on the world’s second-largest economy. Meanwhile, weak manufacturing activities have affected demand in the United States and Europe. A downturn in industrial demand and a weak global environment are likely to continue to weigh on chemical plastics makers over the near term.
     
  • The prolonged trade tiff between the United States and China has plagued players in this space. While the recent completion of the preliminary trade deal averted the implementation of a new round of tariff on chemicals and plastics, the hefty tariffs currently in place have done significant harm to the U.S. chemical plastics industry. Washington and Beijing have levied billions of dollars in punitive tariffs on each others’ products. American products facing tariffs include a range of plastic products. China is one of the biggest export markets for U.S. chemicals and plastics. Beijing’s retaliatory tariffs are hurting U.S. chemicals and plastics exports.
     
  • The U.S. chemical plastic industry is reaping 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 crackers in the United States to make key feedstocks like ethylene and propylene in a cost-effective way. Such investments should boost capacity.

 

Zacks Industry Rank Indicates Glum 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 6% 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 gloomy 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.

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 31.4%.

Despite the industry’s grim near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s 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 22.6% over this period compared with the S&P 500’s rise of 21.9% and the broader sector’s fall of 4.4%.

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 5.85X, below the S&P 500’s 11.95X and the sector’s 9.01X.

Over the past five years, the industry has traded as high as 10.67X, as low as 3.90X, with a median of 6.07X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Bottom Line

The Zacks Chemicals Plastics industry is badly hit by trade tariffs. The hefty tariffs have led to a slowdown in U.S. chemicals and plastics exports. Moreover, the industry players face softer demand across several key end-markets due to a slowdown in industrial activities globally. The coronavirus outbreak along with a weak domestic economy is also expected to lead to a demand slowdown in China over the near term.

Currently, none of the stocks in the Zacks Chemicals Plastics industry carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). We are presenting four stocks with a Zacks Rank #3 (Hold) that investors may choose to hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

PolyOne Corporation POL: The Ohio-based company has expected earnings growth of 8.3% for 2020. The company also delivered positive earnings surprise in three of the trailing four quarters, the average positive surprise being roughly 3.9%.

Price: POL

 



 

Westlake Chemical Corporation (WLK - Free Report) : The Texas-based company has expected earnings growth of 5.7% for 2020. It also has an estimated long-term earnings growth rate of 6.5%.

Price: WLK

 



 

Rayonier Advanced Materials Inc. (RYAM - Free Report) : The Florida-based company has an expected earnings growth of 53.9% for the current year. The consensus EPS estimate for current-year earnings has remained stable over the last 30 days.

Price: RYAM

 


 

Kuraray Co., Ltd. (KURRY - Free Report) : The Japan-based company has an expected earnings growth of 54.7% for the current year. The consensus EPS estimate for current-year earnings has remained stable over the last 30 days.

Price: KURRY

 


 

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