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Coronavirus Casts a Pall Over Diversified Chemical Industry

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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.

Some of the prominent industry players are Dow Inc. (DOW - Free Report) , DuPont de Nemours, Inc. (DD - Free Report) , LyondellBasell Industries N.V. (LYB - Free Report) , Eastman Chemical Company (EMN - Free Report) , PPG Industries, Inc. (PPG - Free Report) and Albemarle Corporation (ALB - Free Report) .


Here are the industry’s three major themes:

  • The diversified chemical industry is grappling with demand slowdown amid the coronavirus pandemic. Companies in this space are likely to witness a short-term demand blow in China, a top consumer of chemicals, as coronavirus-induced shutdowns have hurt industrial activities. Coronavirus has pushed China's economy to the brink. It has slowed down activities in the construction space (a key chemical end-use market) in China. The automotive industry, another major end-market for chemicals, is also getting hammered as the outbreak has pummelled demand and disrupted supply chains. It is also hurting business activities in other parts of Asia and Europe. The difficult demand environment is expected to persist in the near term amid a slowdown in industrial activities globally.
     
  • Hefty trade tariffs remain a drag on the industry. The United States and China have imposed billions of dollars in punitive tariffs on each others’ products. China’s tariffs on American products include a wide swath of chemical products. While the completion of the preliminary trade deal averted the implementation of a new round of tariff on chemicals, the steep tariffs currently in place are already doing damage to the industry. China is among the biggest export markets for U.S. chemicals. Beijing’s tariffs are hurting U.S. chemical exports. There is also the concern that the trade tariffs currently in place may impede new chemical investment on capacity expansion in the United States.
     
  • Companies in this space are exposed to cost pressure associated with raw materials resulting from short supply due to coronavirus. Shutdown of a large number of factories across China to contain the spread of the virus has disrupted the supply of raw materials. The disruption in the supply chain is expected to push up prices of inputs. Higher raw material prices are, thus, likely to squeeze margins of diversified chemical companies over the short term. Some of the companies are also exposed to challenges arising from elevated logistics costs.



Zacks Industry Rank Indicates Glum Prospects
 

The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #223, which places it at the bottom 12% 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 45.1%.

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 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 40.9% over this period compared with the S&P 500’s decline of 8.1% and the broader sector’s fall of 31.2%.

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 6.26X, below the S&P 500’s 9.75X and the sector’s 7.65X.

Over the past five years, the industry has traded as high as 13.36X, as low as 5.43X and at the median of 7.58X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Enterprise Value/EBITDA (EV/EBITDA) Ratio
 

 

Bottom Line

A slowdown in activities across major end-use markets due to the outbreak of coronavirus is expected to hurt demand for chemicals over the short term. Margins of the companies in the diversified chemical space are also likely to remain under pressure due to raw material cost inflation. The industry is also bearing the brunt of hefty trade tariffs.

None of the stocks in the Zacks Chemicals Diversified industry sports a Zacks Rank #1 (Strong Buy). We are presenting one stock with a Zacks Rank #2 (Buy) that is well positioned to grow. There are also three 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.

Air Products and Chemicals, Inc. (APD - Free Report) : The Pennsylvania-based company, carrying a Zacks Rank #2, has an expected earnings growth of 12.9% for the current fiscal year. The company also has an estimated long-term earnings growth rate of 10.3%.

Price and Consensus: APD

 



 

 

FMC Corporation (FMC - Free Report) : The Pennsylvania-based company, carrying a Zacks Rank #3, has expected earnings growth of 3.8% for the current year. The company also delivered positive earnings surprise in each of the trailing four quarters, the average positive surprise being 10.4%.

Price and Consensus: FMC

 



 

Akzo Nobel N.V. (AKZOY - Free Report) : The Netherlands-based company carries a Zacks Rank #3 and has expected earnings growth of 20.7% for the current year. Moreover, it has an estimated long-term earnings growth rate of 22.1%.

Price and Consensus: AKZOY

 



 

Trecora Resources (TREC - Free Report) : The Texas-based company, carrying a Zacks Rank #3, has expected earnings growth of 5.3% for the current year. The company also delivered positive earnings surprise in three of the trailing four quarters, the average positive surprise being 191.7%.

Price and Consensus: TREC

 


 

 

 

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