Back to top

Image: Shutterstock

5 Chemical Stocks Worth a Bet Despite Supply-Chain Snafus

Read MoreHide Full Article

The chemical industry witnessed a strong recovery in 2021 from the havoc wreaked by the global health crisis, thanks to an uptick in demand in key markets.

With the reopening of the major economies around the world, demand for chemicals started to pick up on a rebound in global industrial and manufacturing activities. Notably, demand for chemicals in the United States has been driven by a rise in consumer spending, aided by the accelerated deployment of vaccines coupled with the sizable coronavirus stimulus.
 
While the chemical industry remains hamstrung by supply-chain disruptions and a spike in raw material and logistic costs, healthy demand in key end-use markets bodes well. Stocks like Dow Inc. (DOW - Free Report) , Univar Solutions Inc. (UNVR - Free Report) , AdvanSix Inc. (ASIX - Free Report) , Westlake Corporation (WLK - Free Report) and Tronox Holdings plc (TROX - Free Report) are good choice for investment in the current scenario.

Chemical companies are benefiting from strong demand and higher prices. Demand for both commodity and specialty chemicals has been healthy in key end-use markets.
 
The automotive industry has witnessed a recovery after the virus-led slump in 2020 on the back of strong pent-up demand. Chemical makers have been seeing higher demand from the automotive market notwithstanding the chip shortage, which continues to affect automotive builds globally.

Strength is also being witnessed in residential construction globally, supported by lower interest rates and higher demand for new properties due to the rising work-from-home trend. Companies in the chemical space have also been benefiting from higher demand across healthcare and packaging markets, thanks to coronavirus. These companies also witnessed a recovery in demand across the aerospace and energy markets. A recovery in drilling activities on the back of a surge in oil prices has led to an uptick in demand in the energy space.

The U.S. manufacturing sector also remains in the expansion territory despite supply-chain issues and higher input costs, aided by healthy demand for goods and an upturn in the overall economy. The manufacturing sector is a major driver for the chemical industry, which touches around 96% of manufactured goods.

However, chemical companies are reeling under the effects of raw material cost inflation as well as supply-chain and freight transportation disruptions. Supply chain disruptions resulting from the closure of a large swath of factories due to coronavirus and weather-related events have led to a spike in raw material costs. Supply tightness continues for a number of key raw materials. The industry has also faced headwinds from higher costs associated with logistics constraints and port delays. The shipping bottlenecks have led to a surge in freight costs.

The supply crunch was worsened by Hurricane Ida. Force majeures and plant shutdowns associated with Ida further squeezed the supply of major raw materials including ethylene and propylene and pushed up their prices. The Russia-Ukraine conflict and new lockdowns in China following a resurgence in COVID-19 infections have also threatened to exacerbate pressure on the already strained global supply chain.

The disruptions in the supply of natural gas from Russia as a result of the war are likely to lead to curtailed production of chemicals in Europe and force chemical companies to operate at a reduced rate in the region. The European chemical industry is already grappling with soaring energy and electricity costs, which is driving up production costs. Soaring prices of naphtha (a key feedstock) due to a spike in oil prices are exerting pressure on chemical margins in Europe. The lingering impacts of supply chain upheavals and higher input costs are expected to continue over the short-haul and weigh on the bottom lines of chemical makers.

5 Stocks to Buy

While the chemical industry is exposed to headwinds from supply-chain bottlenecks and higher raw material and logistics costs, higher demand across key markets represents a tailwind for the industry.

We highlight the following five stocks with a solid Zacks Rank that are good options for investment right now. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Dow: Based in Michigan, Dow, sporting a Zacks Rank #1, is benefiting from cost synergy savings and productivity initiatives along with its investment in high-return projects. The company focuses on maintaining cost and operational discipline. Its restructuring program is also expected to deliver margin benefits. DOW also remains committed to investing in attractive areas through highly accretive projects. It is also benefiting from higher demand across a number of markets including personal care, electronics and construction amid the ongoing economic recovery.

The Zacks Consensus Estimate for current-year earnings for Dow has been revised 8.8% upward over the last 60 days. DOW beat the Zacks Consensus Estimate in each of the trailing four quarters at an average of 11.1%. It also has an expected long-term earnings per share growth rate of 29.9%.

Univar: Illinois-based Univar is benefiting from market share gains, operational execution, cost minimization and a robust liquidity position. It is well placed to gain from consistent market expansion and acquisitions. The acquisition of Nexeo Solutions also enhanced UNVR’s capabilities and accelerated its ability to create a significant value for customers, supplier partners, employees and shareholders. Univar is also benefiting from chemical price inflation, which is contributing to its top line growth.

Univar, carrying a Zacks Rank #1, has an expected earnings growth rate of 18.5% for the current year. The consensus estimate for current-year earnings for UNVR has been revised 34.2% upward over the last 60 days. The company beat the Zacks Consensus Estimate in each of the trailing four quarters at an average of 31.5%.

AdvanSix: New Jersey-based AdvanSix is expected to gain from improved end-market conditions and growth of its differentiated products. ASIX is seeing a recovery in demand across a number of markets including automotive, building & construction, electronics and packaging. Higher demand is expected to drive its volumes. Strong agricultural industry fundamentals also bode well.

AdvanSix, carrying a Zacks Rank #1, has an expected earnings growth rate of 64.9% for the current year. The Zacks Consensus Estimate for current-year earnings for ASIX has been revised 53.1% upward over the last 60 days. The company beat the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 23.6%.

Westlake: Texas-based Westlake, sporting a Zacks Rank #1, is benefiting from higher demand in its polyethylene business in specialty applications, especially consumer product packaging, and strength in global demand for polyvinyl chloride (“PVC”) resin. WLK is seeing strong demand and pricing for PVC resin on the back of continued strength in the residential construction market and strong repair and remodeling markets. It is also benefiting from its investment in capacity expansion projects, synergies of acquisitions, and actions to improve operating efficiency and reduce costs.

Westlake has an expected earnings growth rate of 17.6% for the current year. The Zacks Consensus Estimate for WLK’s earnings for the current year has been revised 22.4% upward over the last 30 days. It also has an expected long-term earnings per share growth rate of 31.9%.

Tronox: Based in Connecticut, Tronox carries a Zacks Rank #2. It is benefiting from higher sales volumes of titanium dioxide (TiO2) and zircon. Higher customer demand on the back of the ongoing economic recovery is supporting volume growth. Higher TiO2 and zircon prices are also aiding its performance. TROX's regional pricing initiatives are contributing to pricing gains.

Tronox has an expected earnings growth rate of 34.1% for the current year. The consensus estimate for TROX's current-year earnings has been revised 9.6% upward over the last 60 days. The company beat the Zacks Consensus Estimate for earnings in three of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 19.3%, on average.