Hurricane Harvey ravaged Texas, dumping more than 50 inches of rain — a record high from a single tropical storm. Texas Governor Greg Abbott estimated the damage at $150 billion to $180 billion, eclipsing the previous Hurricanes, Katrina or Sandy. The devastating storm also had an adverse impact on the plastics industry as the Gulf Coast is the epicenter of the U.S. specialty chemicals and petrochemicals industry that provide the building blocks for plastic products.
Harvey Crippled the Foundation of Packaging Industry
Texas accounts for about 70% of U.S. production of ethylene — one of the most important chemicals used for producing plastics. Ethylene is a basic ingredient for final products ranging from plastic bottles to tires to polyester fabric. Industrial ethylene is derived from petroleum or natural gas, and many chemical plants producing ethylene are located near the Gulf Coast’s concentration of petroleum facilities.
Hurricane Harvey has led to the shutdown of around 37% of U.S. production capacity for ethylene, which includes 55% of capacity in Texas. Producers such as The Dow Chemical Company , ExxonMobil Corporation (XOM - Free Report
) , LyondellBasell Industries N.V. (LYB - Free Report
) , Chevron Phillips Chemical, among others have shut or cut back ethylene production. These disruptions have affected 37% of U.S. capacity for making chlorine and caustic soda, salt-derived chemicals used to make vinyl and PVC pipe.
Consequently, a critical part of the supply chain for the industry has been paralyzed with petrochemical plants not in operation and the rail companies that ship them still restoring service. This situation has led to supply shortages and consequently higher prices for U.S. manufacturers.
Raw Material Supply at Stake, Costs To Rise
It will likely take months to resume normalcy. In the meantime, prices for raw materials for plastics are already beginning to rise. The more material impact for the plastic packagers from Harvey will be on resin prices, since the Gulf supplies around 70-75% of the resin in the United States. This could weigh on earnings for the plastic stocks in the next few quarters.
In line with this, Newell Brands Inc. (NWL - Free Report
) trimmed earnings guidance for 2017 on increased inflationary pressures due to low resins’ supply. Nearly all of Newell’s resin suppliers with facilities in Texas and Louisiana have declared force majeure, with many facilities shut for more than a week and some still not operating. The company expects the impact to persist through fourth-quarter 2017 as well as resin inflation to build through the remainder of 2017 and in to 2018. Likewise, Greif, Inc. (GEF - Free Report
) slashed fiscal 2017 adjusted earnings per share guidance to factor in $2.5-million headwind impact related to Hurricane Harvey.
Performance and Zacks Industry Rank
Year to date, the Zacks Containers – Paper and Packaging
industry has underperformed the S&P 500. The industry has clocked a gain of 11.5%, lagging the S&P 500’s increase of 16.5%.
We have 265 industries in our Zacks Coverage Universe, which we put into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). (To learn more visit: About Zacks Industry Rank
The industry occupies a space in the bottom half of the Zacks classified industries with a Rank of #205.
So, it would be prudent to stay away from packaging stocks that carry an unfavorable Zacks Rank now and have been witnessing negative revisions.
(ATR - Free Report
) is one of the leading providers of consumer product dispensing systems. Its products are primarily used in the beauty, personal care, home care, prescription drug, consumer health care, injectables, food and beverage markets. The stock carries a Zacks Rank #5 (Strong Sell).
The estimates for third-quarter 2017, fiscal 2017 and fiscal 2018, have moved south in the past 60 days, reflecting the negative outlook of analysts. For the third quarter, the estimate has gone down 12% to 80 cents per share. For fiscal 2017, the estimate has dipped 3% to $3.35 in the past 60 days. For fiscal 2018, the estimate has gone down 4% to $3.60 per share.
Further, AptarGroup stock has gained 10.1% in the past year, underperforming the industry's gain of 11.9%.
Bemis Company, Inc.
(BMS - Free Report
) , a principal manufacturer of flexible packaging products and pressure sensitive materials, carries a Zacks Rank #4 (Sell). The estimates for third-quarter 2017, fiscal 2017 and fiscal 2018, have moved south in the past 30 days, reflecting the negative outlook of analysts. For the third quarter, the estimate has gone down 11% to 64 cents per share. For fiscal 2017, the estimate has dipped 6% to $2.40 in the past 30 days. For fiscal 2018, the estimate has gone down 6% to $2.67 per share.
The Bemis stock has dipped 7.6% in the past year, grossly underperforming the industry's gain of 11.8%.
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