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Chemical Plastics Outlook Marred by Coronavirus-Led Demand Slump

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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 buffeted by ebbing demand across a number of key end-use markets including automotive, tire, construction and textile. The coronavirus pandemic has led to a slowdown in industrial activities globally, hurting demand for chemicals and plastics. Weaker demand is also exerting pressure on product prices of chemical plastics makers. Demand in China, a major consumer, remains sluggish amid the coronavirus-induced slowdown in the world’s second-largest economy. Meanwhile, weak industrial and manufacturing activities due to pandemic-led shutdowns and restrictions have affected demand in North America and Europe. A downturn in industrial demand and a weak global environment are likely to continue to weigh on players in this space over the short haul.
     
  • The U.S.-China trade tiff has plagued chemical plastics makers. While 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 tariffs are hurting U.S. chemicals and plastics exports.
     
  • The U.S. chemical plastic industry is enjoying the advantage of access to 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 Bleak Prospects

The Zacks Chemicals Plastics industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #199, 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 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 89.1%.

Despite the industry’s glum 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 24.9% over this period compared with the S&P 500’s rise of 5.2% and the broader sector’s fall of 6.4%.

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 6.49X, below the S&P 500’s 11.24X and the sector’s 9.03X.

Over the past five years, the industry has traded as high as 10.82X, as low as 3.78X, with a median of 6.19X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Bottom Line

The Zacks Chemicals Plastics industry has been hit by a downturn in demand amid the pandemic. The industry players are hamstrung by weaker demand across several key end-markets due to a coronavirus-led slowdown in industrial activities globally. Hefty trade tariffs have also led to a slowdown in U.S. chemicals and plastics exports.

None of the stocks in the Zacks Chemicals Plastics industry sport a Zacks Rank #1 (Strong Buy). We are presenting one stock with a Zacks Rank #2 (Buy). 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.

Rayonier Advanced Materials Inc. (RYAM - Free Report) : The Florida-based company, carrying a Zacks Rank #2, has an expected earnings growth of 49.5% for the current year. The consensus EPS estimate for the current year has been revised 18% upward over the last 60 days. The stock has also shot up roughly 127% over the past three months.

Price: RYAM

 



 

Kuraray Co., Ltd. (KURRY - Free Report) : Based in Japan, Kuraray currently carries a Zacks Rank #3. The consensus EPS estimate for the current-year earnings has remained stable over the last 60 days. The company’s shares have also gained around 34% over the past three months.

Price: KURRY

 



 

Trinseo S.A. (TSE - Free Report) : The Pennsylvania-based company, carrying a Zacks Rank #3, has delivered a positive earnings surprise of 316.7% in the last reported quarter. The stock has also rallied roughly 43% over the past three months.

Price: TSE

 



 

JSR Corporation (JSCPY - Free Report) : The Japan-based company currently has a Zacks Rank #3. The consensus EPS estimate for the current-year earnings has remained stable over the last 60 days. The stock is also up around 29% over the past three months.

Price: JSCPY



 

 

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