The chemical industry is back on the growth path after being stuck in limbo for a spell, making it an attractive investment proposition. The industry’s upturn is supported by an upswing in the world economy and strength across major end-use markets such as construction and automotive.
The highly cyclical industry put up a commendable performance in the second quarter, continuing the momentum witnessed in the first. The June quarter showed continued strong demand trends for chemicals across key end-markets such as construction, automotive and electronics.
A number of companies in the space also came up with better-than-expected earnings in the second quarter. The outperformance was driven by continued healthy demand across automotive and construction markets as well as strategic measures including productivity improvement, pricing actions, portfolio restructuring and earnings-accretive acquisitions.
Notwithstanding some lingering headwinds, the chemical industry’s momentum is expected to continue through the second half of 2017 as the fundamental driving factors remain firmly in place.
U.S. Chemical Industry on Solid Ground
The U.S. chemical industry got off to a strong start in the third quarter with chemical production rising 2.3% year over year in July on gains across all regions, per a recent report from the American Chemistry Council (ACC), an industry trade group.
The U.S. Chemical Industry is set to ride high this year. The ACC envisions accelerated growth for the domestic chemical industry on the back of an improving global economy and a surge in shale-linked capital investment. The ACC, in its year-end 2016 outlook, said that it expects national chemical production to rise 3.6% in 2017.
The shale gas bounty in the United States has been a huge driving force behind chemical investment on plants and equipment in the country and has provided domestic petrochemicals producers a compelling cost advantage over their global counterparts. The shale boom has also made the United States an attractive investment hotspot and incentivized a number of chemical companies to invest billions of dollars to beef up capacity.
According to the ACC, domestic chemical investment related to shale gas has reached as high as around $185 billion. Such investments – many backed by Federal government support – are expected to boost capacity and export over the next several years.
European Chemical Sector Back on Track
The European chemical industry has swung back to life on the back of improving global economic sentiment and a resurgent Eurozone economy. Per the European Chemical Industry Council (CEFIC), the business environment for the European chemical industry was more favorable in the second quarter compared with the first. Chemical business confidence also continued to improve in the second quarter.
The European chemical industry also saw a spike in output across most chemical sub-sectors during first-half 2017, with overall production rising 3.1% year over year. The CEFIC envisions chemical output in the European Union to rise 1.5% year over year in 2017 after a paltry growth of 0.5% in 2016.
Favorable Industry Rank & Solid Price Performance
The Zacks Industry Rank of 45 carried by the Zacks Chemicals Diversified industry is a testimony to the fact that the chemical industry is in fine shape. The favorable rank places the industry in the top 18% of the 250+ groups enlisted.
The Zacks Chemicals Diversified industry has also outperformed the broader market over the past year. The industry has gained around 28% over this period, higher than S&P 500’s corresponding return of roughly 16.9%.
5 Chemical Growth Plays
The chemical industry’s momentum is expected to continue through the balance of 2017 on continued strength across major end-markets. Amid such a backdrop, it would be a prudent idea to invest in chemical stocks with compelling growth prospects if you are looking to reap solid returns from your portfolio.
Growth investors look for stocks with aggressive earnings or revenue growth potential, which should lead to higher stock prices. Here we put a spotlight on chemical stocks that are poised for healthy growth. With the help of our Style Score System, we have picked five stand-out stocks that have excellent 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.
Kronos Worldwide, Inc. (KRO - Free Report)
Headquartered in Dallas, TX, Kronos sports a Zacks Rank #1 and a Growth Score of B. The company has expected earnings growth of 354.8% for 2017. It delivered average positive earnings surprise of 76.1% over the trailing four quarters. Kronos also has a long-term expected earnings per share (EPS) growth rate of 5%.
Koninklijke DSM N.V. (RDSMY - Free Report)
Our next pick in the space is Netherlands-based Koninklijke DSM armed with a Zacks Rank #1 and a Growth Score of B. The company has expected earnings growth of 46.3% for 2017. It also has a long-term expected EPS growth rate of 7.1%.
Annual estimates for Koninklijke DSM have also moved north over the past 60 days, reflecting analysts’ confidence on the stock. Over this period, the Zacks Consensus Estimate for 2017 and 2018 for the company have increased by around 11.4% and 8%, respectively
Orion Engineered Carbons S.A. (OEC - Free Report)
Luxembourg-based Orion Engineered Carbons is another attractive choice with a Zacks Rank #2 and a Growth Score of A. The Zacks Consensus Estimate for earnings for 2017 is currently pegged at $1.79, reflecting an expected year-over-year growth of 19%. The estimates for both 2017 and 2018 for the company have also increased by around 11% over the last 60 days.
Koppers Holdings Inc. (KOP - Free Report)
Pittsburgh, PA-based Koppers sports a Zacks Rank #2 and a Growth Score of B. The company has long-term expected EPS growth rate of 18%. It also delivered positive earnings surprise in each of the trailing four quarters with an average beat of 56.6%. Moreover, the company has expected earnings growth of around 13.5% for the current year.
Moreover, the estimates for 2017 and 2018 for Koppers have increased by 2.4% and 1.8%, respectively, over the last 60 days.
BASF SE (BASFY - Free Report)
Germany-based BASF has a Zacks Rank #2 and a Growth Score of B. The company has expected earnings growth of 30.6% for 2017. It also has a long-term expected EPS growth rate of 8.6%. The estimates for 2017 and 2018 for BASF have also increased by around 7.9% and 2.4%, respectively, over the last 60 days.
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