The chemical industry grappled with a slowdown in demand in certain markets, including consumer durables and building & construction, and an unprecedented customer inventory destocking this year. Lower consumer spending due to inflationary pressures in Europe and a slow recovery in China impacted demand.

While the industry remains buffeted by demand headwinds, strategic measures, including operating cost reductions and aggressive price hikes along with declining raw material costs, bode well. Stocks like Axalta Coating Systems Ltd. (AXTA Quick QuoteAXTA - Free Report) , Hawkins, Inc. (HWKN Quick QuoteHWKN - Free Report) and L'Air Liquide S.A. (AIQUY Quick QuoteAIQUY - Free Report) are good choices for investment in the current scenario.

Companies in the chemical space have faced headwinds from a slowdown in certain key markets in 2023. The sluggishness in the building & construction market and destocking in consumer electronics have played spoilsport. In North America, uncertainties surrounding the U.S. housing market are weighing on building & construction. The housing market is bearing the brunt of interest rate hikes. Softer demand in industrial and consumer durables is hurting chemical volumes. Weaker global economic activities led to a higher level of uncertainty, affecting the chemical space.

A slower recovery in economic activities in China following the lifting of the restrictions related to the resurgence in COVID-19 infections has hurt chemical demand in that country this year. Global industrial activities have been affected by the weaker demand recovery in China. The slowdown in Europe, resulting from the war in Ukraine and weaker consumer spending due to high levels of inflation and rising interest rates, have also led to softer demand in that region. The energy and feedstock inflation resulted in reduced industrial production and consumer spending in Europe.

Nevertheless, demand for chemicals in the automotive market has remained healthy, aided by a recovery in automotive production on an improved supply of semiconductors. Notably, the U.S. automotive sector got back into gear after reeling under the effects of the chip crisis for nearly two years. The recent resolution to the six-week United Auto Workers (UAW) strike also augurs well for chemical demand in this space.

Demand in packaging and healthcare also remains strong. Moreover, chemical companies are seeing a recovery in demand across the aerospace and energy markets. A rebound in drilling activities on the back of an uptick in oil prices has led to the demand recovery in the energy space. On a more positive note, customer inventory destocking — that hurt the chemical industry for much of this year — has largely ended, which should lead to an uptick in chemical demand in 2024. A moderation in raw material and energy costs driven by the easing of supply-chain disruptions is also expected to act as a tailwind.  

Meanwhile, chemical companies continue to take a host of strategic measures, including cost-cutting and productivity improvement, operational efficiency improvement and actions to strengthen the balance sheet and boost cash flows amid a challenging environment. In particular, the industry participants are aggressively implementing actions to bring down costs. They are also raising selling prices to counter inflation. Such moves are likely to help the industry sustain margins amid the prevailing challenges. A decline in raw material and energy costs driven by the easing of supply-chain disruptions also augurs well for the chemical industry heading into 2024.

3 Chemical Stocks Poised to Run Higher

While softer demand in construction and electronics is likely to continue to plague the chemical industry over the near term, a rebound in automotive production following the easing of the semiconductor crisis and moderating inventory destocking augur well for the industry heading into 2024. Based on strong fundamentals and healthy prospects, we have shortlisted stocks that are expected to continue their winning streak in 2024.

For this, we have taken the help of the Zacks Stocks Screener to choose stocks that have a market cap of more than $1 billion and currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). Our research shows that stocks with a Zacks Rank #1 or 2 offer the best investment options. Moreover, these stocks have gained more than 30% this year.

Image Source: Zacks Investment Research

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

Here are the three chemical stocks that meet the criteria:

Axalta Coating Systems: Pennsylvania-based Axalta is expected to benefit from higher average prices and improved volumes. Price and product mix benefits are supporting results in its Performance Coatings segment. Continued momentum in refinish is expected to offset weakness in industrial markets. The Mobility Coatings business is also expected to be driven by a recovery in global automotive production, new business wins and strong pricing. Strong market demand is likely to drive volumes in this business. Axalta has also strategically expanded its portfolio by acquiring Andre Koch AG, a well-established Refinish distribution partner headquartered in Switzerland.

Axalta, carrying a Zacks Rank #1, has an expected earnings growth rate of 21% for 2024. The Zacks Consensus Estimate for 2024 earnings of AXTA has been revised 9.8% upward over the past 60 days. Shares of AXTA have popped 34% so far this year.

Hawkins: Minnesota-based Hawkins is seeing strong growth in its Water Treatment segment, reflecting the company's strategic emphasis on the water treatment sector, including the successful integration of recent acquisitions, such as EcoTech Enterprises. These moves have solidified the company's position in the water treatment market. Its judicious pricing strategy to counter cost inflation is also supporting results. HWKN also remains committed to enhancing shareholders’ value.

Hawkins, carrying a Zacks Rank #2, has expected earnings growth of 21% for fiscal 2024. The Zacks Consensus Estimate for HWKN’s earnings for fiscal 2024 has been revised upward by 1.8% over the last 60 days. It beat the Zacks Consensus Estimate for earnings in each of the last four quarters at an average of 27.5%. HWKN shares have also shot up 90.2% year to date.

Air Liquide: France-based Air Liquide is expected to benefit from its diversified business model, strong project backlog and investment for future growth. AIQUY is seeing an uptick in gas and services activities driven by healthcare and industrial merchant businesses. It remains focused on executing its actions to drive operating performance in sync with its ADVANCE strategic plan.

Air Liquide currently carries a Zacks Rank #2. It has an expected earnings growth rate of 7.7% for 2024. The Zacks Consensus Estimate for AIQUY’s 2024 earnings has been stable over the last 60 days. The stock has rallied 36.9% year to date.