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U.S. Chemical Industry Set to Ride High: 5 Stocks for 2018

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The American chemical industry is riding an upswing of the major world economies with growth rate for the industry surpassing the 20-year average – according to the recently published “Year End 2017 Chemical Industry Situation and Outlook” by the American Chemistry Council (ACC).

The Washington, DC-based chemical industry trade group said that chemical output continued to improve this year notwithstanding the disruptions from Hurricane Harvey with strong gains expected continue in the next two years. “Manufacturing has turned a corner, business investment is on the rise, and domestic oil and gas production is on the rebound. It all sets the stage for tremendous momentum, expansion and capital investment,” ACC chief economist Kevin Swift noted.
 
U.S. Chemical Industry Set for Solid Growth


The outlook for the American chemical industry paints an encouraging picture. The ACC envisions national chemical production (excluding pharmaceuticals) to rise 0.8% in 2017, further accelerating to a 3.7% growth in 2018 and a 3.9% growth in 2019. The growth is expected to be spurred by higher demand across light vehicles and housing markets, capital investments and improved export markets.

The trade group also expects basic chemicals production to expand 4.7% in 2018 and further gain steam with a 5.2% rise in 2019 on the heels of new capacity additions. Major export markets such as Latin American and Asia are expected to play a significant role in production growth. The specialty chemicals segment is also expected to see production growth of 3% in 2017 and 2.3% in 2018, per the ACC.

Surging Capital Spending

According to the ACC, the United States remains an attractive investment destination for chemical investment and domestic chemical makers continue to enjoy the advantage of access to abundant and cheaper feedstocks and energy. This is driving investment in chemical production projects.

The trade group noted that roughly 320 chemical projects have been already announced worth more than $185 billion, 62% of which is foreign direct investment. Moreover, roughly 65% of the chemical investment announced since 2010 are complete or under construction. New capacity is expected to provide a boost to chemical production as these investments come on stream.

Chemical industry capital spending also continues to go up, clocking $38 billion this year, per the ACC. This also accounts for one-half of overall construction spending by the manufacturing sector. The trade group expects capital spending to rise 6.3% in 2018 and 6.8% in 2019 and eventually reach $48 billion by 2022.

Strengthening Export Markets

The ACC expects improving export markets to contribute to solid growth of the domestic chemical industry. Strengthening export markets and increasing capital spending are driving chemical demand across key end-use markets such as light vehicles and housing.  

Total chemical exports went up 4.9% to $127 billion this year while imports rose 2.8% to $96 billion, the trade group noted. Higher exports will result in the United States having a $32 billion trade surplus in chemicals (barring pharmaceuticals) in 2017. Moreover, the ACC sees two-way trade between the United States and its foreign partners to expand 4% year over year and reach $223 billion this year.

5 Chemical Stocks for 2018

The U.S. chemical industry’s upturn is expected to continue next year on continued demand strength across major end-markets and significant capital investment. 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 in 2018.

We highlight the following five stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kronos Worldwide, Inc. (KRO - Free Report)      

Texas-based Kronos is a solid choice, with a Zacks Rank #1. The company has expected earnings growth of 41.1% for 2018. It also delivered an average positive earnings surprise of 58.8% over the trailing four quarters. Moreover, the company has long-term expected earnings per share (EPS) growth of 5%. The stock has also gained roughly 116% year to date.

Kronos is witnessing strong demand for titanium dioxide (TiO2) products across most segments. The company is also gaining from higher pricing and implementation of certain productivity-enhancing improvement projects at some of its facilities.

Westlake Chemical Corporation (WLK - Free Report)

Headquartered in Houston, TX, Westlake sports a Zacks Rank #1. The company has expected earnings growth of 25.7% for 2018. It also has an expected long-term EPS growth of 10.6%. Moreover, Westlake has topped the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 23.5%. The stock has also gained roughly 80% year to date.

Westlake is gaining from higher demand for all major products in both Vinyls and Olefins segments and synergies of the Axiall acquisition. The Axiall acquisition has diversified the company’s product portfolio and geographical operations, creating a North American leader in Olefins and Vinyls.

Kraton Corporation (KRA - Free Report)

Our next pick in the space is Houston, TX-based Kraton, armed with a Zacks Rank #1. The company has expected earnings growth of 30.6% for 2018. It also delivered average positive earnings surprise of 32.9% over the trailing four quarters. Moreover, the stock has gained around 67% year to date.

Kraton is benefiting from the acquisition of Arizona Chemical in the form of cost reduction and operational improvements. The company also remains committed to steer organic growth in key markets through state-of-the-art innovation and infrastructure. It should also gain from its sustained efforts to reduce debt.

Albemarle Corporation (ALB - Free Report)

Headquartered in Charlotte, NC, Albemarle carries a Zacks Rank #2. The company has an expected earnings growth of 16.9% for 2018. It delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 4.3%. The company also has an expected long-term EPS growth of 14.8%. The stock has also returned roughly 51% year to date.

Albemarle is seeing significant momentum in its lithium business and is well placed to leverage strong expected growth in the battery-grade lithium market. The company is executing a number of projects that should boost its global lithium derivative capacity.

Celanese Corporation (CE - Free Report)

Irving, TX-based Celanese carries a Zacks Rank #2 and has long-term expected EPS growth of 9%. The company also has expected earnings growth of 11.7% for 2018. Moreover, it delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 2.5%. The stock has also gained 36% year to date.

Celanese’s strategic measures including operational cost savings through productivity actions and efficiency enhancement should lend support to its earnings in 2018. Further, the company should benefit from capacity expansion actions, acquisitions and its acetate tow joint venture with Blackstone.

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