The chemical industry is among the industries that have been badly hit by the bitter year-long trade tussle between the United States and China. The damaging effects of the trade war were evident from the industry’s lackluster performance in 2018.
Washington and Beijing levied billions of dollars in punitive tariffs on each others’ products last year. China’s list of U.S. goods hit with tariffs includes an array of petrochemicals, specialty chemicals and plastics.
Although recent negotiations between the world’s two biggest economies have raised hopes of a possible resolution of the trade spat, the tariffs currently in place are already doing damage to the chemical industry. In particular, the U.S. chemical industry is bearing the brunt of the trade conflict.
China is among the largest export markets for U.S. chemicals. Beijing’s countermeasures have created an uncertain demand environment for U.S. chemical products in China. The tariffs are hurting U.S. chemical exports and the competitiveness of the American chemical industry.
Chemical makers are also seeing weaker demand in China associated with the U.S.-China trade tiff amid a slowing Chinese economy. Notably, the trade friction has led to a slowdown in demand in the automotive market (a major chemical end-use market) in China.
A downturn in the global economy, partly due to the trade tensions, is another concern for the chemical industry. Economic conditions have, in particular, weakened across emerging economies. Moreover, Brexit and other concerns have led to a slowdown in the European economy. Slowdown in the world economy would hurt growth of the chemical industry.
Notwithstanding the challenges, the chemical industry is poised for an upswing in 2019. In particular, the U.S. chemical industry is expected to run higher this year on the back of strength across major end-use markets, higher industrial activities and gains in business investment.
The American Chemistry Council (“ACC”), a leading industry trade group, expects national chemical production (excluding pharmaceuticals) to rise 3.6% in 2019. The growth is expected to be spurred by gains in manufacturing and export and sustained demand across light vehicles and housing markets.
Meanwhile, the European Chemical Industry Council (“CEFIC”) envisions the European chemical industry to recover in 2019 from a decline in demand from the automotive industry in 2018. The CEFIC expects chemical output in the European Union to rise 0.5% year over year in 2019, which would mark a rebound from a 0.5% decline 2018.
Expectations for Q1
Per the Zacks Industry classification, the chemical industry is under the broader Basic Materials sector. Earnings picture for the Basic Materials sector for the first quarter looks glum. The sector is among the Zacks sectors that are expected to see a double digit decline in earnings in the first quarter. Overall earnings for the sector are projected to fall 17.7% on 2.7% lower revenues, per the latest Earnings Preview.
Chemical makers face margin headwinds in the first quarter from a spike in costs of raw materials as a result of short supply partly due to production outages and plant shutdowns. The stricter environmental policy in China has led to the tightening in the supply of certain key raw materials as a result of plant closures. The disruption in the supply chain has pushed up the prices of inputs. Some of the chemical companies are also exposed to challenges from elevated energy and logistics costs.
Nevertheless, the companies should be able to offset the concerns with strategic measures, including cost-cutting and productivity improvement and actions to raise selling prices. A number of companies including Eastman Chemical Company (EMN - Free Report) and Celanese Corporation (CE - Free Report) are taking aggressive price increase actions in the wake of raw material cost inflation. These actions will likely support their margins in the first quarter.
Moreover, chemical companies remain actively focused on mergers and acquisitions to diversify and drive growth. Synergies from acquisitions should also lend support to earnings in the March quarter.
Picking the Winning Stocks
Companies in the chemical space face headwinds from cost inflation and some demand weakness amid the trade conflict. Nevertheless, strategic measures including productivity improvement and price hike actions are likely to aid the performance of chemical makers in the first quarter.
As such, a sneak peek at the space for some potential winners backed by a solid Zacks Rank could be a great idea for investors looking to gain from the first-quarter earnings season.
With the help of the Zacks Stock Screener, we have shortlisted chemical stocks that have an estimated year over year earnings per share (EPS) growth of 5% or more for the to-be-reported quarter. Further, these stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
3 Chemical Stocks to Buy
Below we discuss three chemical stocks that are worth investing in before the first-quarter earnings season hits full throttle.
Innospec Inc. (IOSP - Free Report)
Colorado-based Innospec sports a Zacks Rank #1. It has an expected EPS growth of 12.8% for the first quarter. Moreover, the company delivered positive earnings surprise in three of the trailing four quarters, with an average positive surprise of 8%. The company also has an expected EPS growth of 3.5% for the current year. Earnings estimates for the current year have been revised 5.3% upward over the last 90 days.
Tronox Limited (TROX - Free Report)
Our next pick is Connecticut-based Tronox, carrying a Zacks Rank #2. The company has an expected EPS growth of 300% for the first quarter. The company also has an expected EPS growth of 50% for the current year. Earnings estimates for the current year have been revised 2.4% upward over the last 90 days.
W. R. Grace & Co. (GRA - Free Report)
Maryland-based W. R. Grace carries a Zacks Rank #2. The company has an expected EPS growth of 7.3% for the first quarter. Moreover, the company delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of roughly 12.2%. The company also has an expected EPS growth of 10.4% for the current year. Moreover, earnings estimates for the current year have been revised 3.2% upward over the last 90 days.
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