The chemical industry has staged a comeback from the coronavirus-induced slowdown in the first half of 2020. Improved macroeconomic conditions and an upturn in demand across major end-use industries from the pandemic-led slump has pulled the industry out of its funk.
The pandemic put brakes on industrial activities globally for much of the first half, denting demand for chemicals in key end-use markets including automotive, construction and electronics. The industry also faced headwinds from short supply of raw materials and higher logistics costs as a result of the contagion. Weaker demand coupled with a sharp decline in oil prices also exerted pressure on the product prices of chemical makers.
However, a rebound in industrial demand has put the wind back in the sails of the chemical industry. With the easing of restrictions on business activities globally and an economic rebound in China — a top consumer of chemicals — demand for chemicals started to pick up from the third quarter across major end-use industries.
Economic activities in China are gathering steam as the country continues its recovery from the pandemic-led slowdown. China’s industrial sector is gradually returning to pre-pandemic levels, supported by strengthening domestic demand and government stimulus measures.
China's manufacturing activities are picking up pace on strengthening demand and government’s efforts to shrug off the impacts of the pandemic. The country’s construction sector is also gaining momentum on Beijing’s infrastructure spending push.
Notably, the recovery in China’s manufacturing sector gathered momentum in November on growth in new export orders buoyed by strong overseas demand. Overseas new orders were driven by holiday purchases despite the resurgence of coronavirus cases. Strong domestic demand also boosted manufacturing orders in November. China’s official manufacturing purchasing managers’ index expanded to 52.1 in November from 51.4 in October, per National Bureau of Statistics. A reading above 50 indicates expansion in activity. The momentum in manufacturing is expected to continue on the heels of government’s efforts to boost consumption and a supportive monetary policy.
Meanwhile, business activities are recovering in the United States as major parts of the nation have reopened with the loosening of restrictions. Notably, the U.S. automotive sector has regained its mojo after the virus-led slump on the back of a rebound in customer demand. U.S. auto sales have bounced back after bottoming in April amid lockdown restrictions. The rebound has been fueled by pent-up demand, cheap borrowing costs and increasing inclination towards private transportation in the wake of the pandemic. U.S. automakers are ramping up production to boost lean vehicle inventories at dealerships. A rebound in automotive OEM production rates has led to a recovery in demand for chemicals in the automotive market.
The U.S. housing sector has also witnessed a recovery. The sector’s upturn has been backed by low interest rates and higher demand for new properties due to the rising trend of working from home amid the pandemic.
Moreover, the U.S. manufacturing sector has rebounded from a sharp contraction in the early days of the pandemic on a return of demand and a recovery in the overall economy. U.S. factory orders rose for the sixth straight month in October as steady recovery in the manufacturing sector continues. Factory orders rose 1% in October after a 1.3% rise in September, per the U.S. Commerce Department. The rebound in manufacturing activities bodes well for the chemical industry as manufacturing is a key indicator for chemical demand.
5 Chemical Growth Plays
The chemical industry is on the mend after bearing the brunt of coronavirus fallout. A rebound in China and recovering manufacturing activities around the world augur well for the industry. As such, it would be prudent to zero in on stocks in the space that have healthy prospects.
Growth investors look for stocks with aggressive earnings or revenue growth potential, which should lead to higher stock prices. With the help of our
Style Score System, we have picked five stand-out chemical stocks that have compelling prospects and might offer solid investment returns.
Our research shows that stocks with Growth Style Score of A or B when combined with Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space. You can see
the complete list of today’s Zacks #1 Rank stocks here. Cabot Corporation ( CBT Quick Quote CBT - Free Report)
Massachusetts-based Cabot sports a Zacks Rank #1 and a Growth Score of A. The company should gain from a recovery in demand from its automotive and tire customers from the pandemic-led slowdown. It will also benefit from the acquisition of Shenzhen Sanshun Nano New Materials. The acquisition significantly bolsters the market position and formulation capabilities of Cabot in the high-growth batteries market, especially in China.
Cabot has expected earnings growth of 58.2% for the current fiscal year. Moreover, the Zacks Consensus Estimate for earnings for the current fiscal has been revised 21.4% upward over the last 60 days. The company’s shares are also up around 11% over the past three months.
Koppers Holdings Inc. ( KOP Quick Quote KOP - Free Report)
This Pennsylvania-based company has a Zacks Rank #2 and a Growth Score of A. Koppers is witnessing strong demand for residential wood treatment preservatives in most geographic regions. It remains focused on capturing growth opportunities in wood preservation. It also remains committed to delivering strong cash flows and reducing debt.
Koppers has expected earnings growth of 16% for the current year. The company has also delivered an earnings surprise of 25.3%, on average, over the trailing four quarters. Moreover, the consensus estimate for current-year earnings has been revised 12.3% upward over the last 60 days. The stock is also up 22% over the past three months.
Quaker Chemical Corporation ( KWR Quick Quote KWR - Free Report)
Pennsylvania-based Quaker Chemical carries a Zacks Rank #2 and a Growth Score of B. The company's combination with Houghton International, Inc. and the acquisition of the operating divisions of Norman Hay plc are expected to drive its top line. It is also expected to benefit from cost-saving actions, integration synergies, improvement in product margins, and healthy cash flows.
The Zacks Consensus Estimate for current-year earnings has been revised 23.6% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 50.3%. Moreover, its shares have rallied around 33% over the past three months.
Valvoline Inc. ( VVV Quick Quote VVV - Free Report)
Kentucky-based Valvoline has a Zacks Rank #2 and a Growth Score of B. Improving miles driven trends, following the easing of pandemic-related restrictions are expected to drive its top line. The company should also benefit from its cost-reduction program, strategic acquisitions and investments in the expansion of its Quick Lubes network.
Valvoline has expected earnings growth of 10.8% for the current fiscal year. It has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 20.8%. Moreover, the Zacks Consensus Estimate for the current year has been revised 7.2% upward over the last 60 days. The company’s shares are also up around 13% over the past three months.
PPG Industries Inc. ( PPG Quick Quote PPG - Free Report)
Pennsylvania-based PPG carries a Zacks Rank #2 and a Growth Score of B. It is executing an aggressive cost-cutting and restructuring strategy, which is expected to support its bottom line. It is also taking steps to grow business inorganically through strategic acquisitions. Acquisitions including Industria Chimica Reggiana and Alpha Coating Technologies are expected to contribute to the company’s top line this year.
The consensus estimate for current-year earnings for PPG has been revised 11.6% upward over the last 60 days. The company has also delivered an earnings surprise of 12.3%, on average, over the trailing four quarters. The stock is also up around 15% over the past three months.
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