The chemical industry is back on track after the recent lows. The industry’s upturn is due to strength across key end-use markets such as construction, automotive and electronics and an upswing in the world economy.
The chemicals industry has outperformed the broader market over the past year. The industry has returned around 16% over the same period, while the S&P 500 index advanced roughly 14%.
Chemical companies continue to shift their focus on attractive, growth markets in an effort to whittle down their exposure on other businesses that are dealing with weak demand. The industry is also seeing a pick-up in consolidation activities – exhibited by a wide swath of deals in the recent past – as chemical makers are increasingly looking to diversify their business and enhance operational scale. Moreover, margins are expected to see improvements due to cost-cutting measures and productivity improvement actions.
Chemical makers also continue to see strong demand from the automotive sector. A recovery across housing and commercial construction has been another supporting factor for the chemical industry recovery.
The prospects for the U.S. chemical industry looks bright. The American chemical industry is on course for strong growth this year and the next, notwithstanding a few headwinds. The American Chemistry Council (ACC), an industry trade group, envisions accelerated growth for the domestic chemical industry on the back of an improving global economy and a surge in shale-linked capital spending.
The shale gas bounty is projecting to drive investment on plants and equipment in the U.S. Chemical makers are ratcheting up investment on shale gas-linked projects to take advantage of ample and affordable natural gas supplies.
The European chemical industry has also swung back to life after remaining in a rut for a while. The business environment for the European chemical industry has improved on the back of improving global economic sentiment and a resurgent Eurozone economy.
Q2 Performance So Far
We have crossed the midpoint of the Q2 earnings season, having already seen positive earnings surprises from a host of chemical names. As per the Zacks Industry classification, the chemical industry is under the broader Basic Materials sector. Based on our latest report, 60% of the sector participants on the S&P 500 index reported their quarterly numbers as of Jul 28. Earnings for these companies are up 9.7% from the same period last year on 4.9% higher revenues.
However, the growth picture for Q2 reflects a moderation from Q1 with earnings expected to improve by 6.2%, and revenues expected to increase by 3.3%. This is in contrast to a 15.9% increase in earnings in Q1 on 5.4% higher revenues.
How to Pick the Winners?
Given the large number of players operating in the chemicals space, picking the right stocks is apparently not an easy task. But our proprietary methodology makes it fairly simple. One can trim down the list with the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.
Earnings ESP – the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate – is our proprietary methodology for determining stocks that have high chances of notching up earnings surprises in their next announcements. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as much as 70%.
Below we list three chemical stocks that have the right combination of elements to rack up positive surprises this earnings season:
The Chemours Company (CC - Free Report) , which offers performance chemicals across North America, the Asia Pacific, Europe, the Middle East, Africa, and Latin America, will release its second-quarter results after the bell on Aug 2. The stock has an Earnings ESP of +4.44% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for earnings for the second quarter stands at $0.90. The company has delivered positive earnings surprises in 3 of the last 4 quarters, with an average positive surprise of 39.8%.
Axalta Coating Systems Ltd. (AXTA - Free Report) , which makes and markets coatings systems, will be reporting second-quarter results before the bell on Aug 3. The stock has an Earnings ESP of +5.26% and carries a Zacks Rank #2. The Zacks Consensus Estimate for the second quarter stands at $0.38. The company has an expected long-term earnings growth of 15% and has delivered a positive earnings surprise of 8.3% in the first quarter.
International Flavors & Fragrances Inc. (IFF - Free Report) , which develops and makes of flavor and fragrance products, will report second-quarter results after the bell on Aug 8. This Zacks Rank #2 stock has an Earnings ESP of +0.69%. The company has an expected long-term earnings growth of 8.6%. The Zacks Consensus Estimate for the second quarter is currently $1.44.
While the chemical industry remains saddled by a few challenges, its healthy momentum is on track to continue through 2017. Strategic initiatives including continued focus on cost and productivity, operational efficiency improvement and expansion of scale through acquisitions should help chemical makers weather the macroeconomic and industry-specific headwinds.
Amid this backdrop, a sneak peek at the space for some potential winners backed by a solid Zacks Rank and a positive Earnings ESP could be a great idea for investors looking to gain from this earnings season.
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