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U.S. Chemical Production on an Upswing: 4 Stocks Worth a Bet

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U.S. chemical production continues to leap in the second quarter with May seeing a rise in production on gains in output across most chemical producing regions, according to the latest monthly report from the American Chemistry Council ("ACC").

The Washington, DC-based chemical industry trade group said that the U.S. Chemical Production Regional Index ("CPRI") went up 0.4% in May on a monthly comparison basis, following a 0.2% rise a month ago. The U.S. CPRI, which is measured using a three-month moving average, was created to track chemical production in seven regions nationwide.

May Data Shows Broad-based Regional Gains

The May readings showed an uptick in chemical production on a monthly comparison basis across all regions barring the Ohio Valley.

The Gulf Coast region – the epicenter of the U.S. specialty chemicals and petrochemicals industry – saw the biggest gain with output moving up 0.5%. Production from Northeast and Midwest rose 0.3% and 0.2%, respectively, in the reported month. Output rose 0.1% in Mid-Atlantic, West Coast and Southeast. Production was flat in the Ohio Valley.

By segments, chemical production was mixed. Gains in organic chemicals, inorganic chemicals, manufactured fibers, plastic resins, synthetic rubber, other specialty chemicals and industrial gases were neutralized by lower production in adhesives, fertilizers, crop protection chemicals, consumer products and coatings.

According to the ACC, activity for the U.S. manufacturing sector – the largest consumer of chemical products – edged down 0.1% in May, marking the fourth consecutive month of decline.

The manufacturing sector serves as a barometer to gauge the overall health of the U.S. economy and has a major influence on the chemical industry. The sector is a major driver for the chemical industry which touches around 96% of manufactured goods. Manufacturing activity is also a key indicator for chemical production.

Within the manufacturing sector, production rose in several chemistry end-user markets in May including motor vehicles and parts, computers, semiconductors, oil and gas extraction, rubber products, apparel and furniture.

U.S. factory activity slowed in May amid concerns over an escalation in the U.S.-China trade tiff and a slowdown in the world economy.

Meanwhile, overall chemical production also went up 2.1% on a year over year comparison basis in May with all regions racking up gains. Biggest gains were witnessed across Northeast, Mid-Atlantic and West Coast regions.

U.S. Chemical Industry Poised for Upside

Notwithstanding slowing global growth, escalating trade tensions and a slowdown in manufacturing, the ACC envisions the U.S. chemical industry to grow 2.5% in 2019. The trade group sees growth in important end-use markets to support the expansion of the industry. While the automotive sector is expected to remain at high levels, slow recovery in the housing market is expected to continue.

The ACC expects strong gains in production in organic chemicals, inorganic chemicals and other specialty chemicals in 2019, partly masked by modest declines in production of agricultural chemicals and consumer products.

Shale-linked Investments are also expected to drive growth in the U.S. chemical industry. The United States remains an attractive investment destination for chemical investment and domestic chemical industry continue to enjoy the competitive advantage of access to abundant supplies of shale gas and natural gas liquids (NGLs).

This is driving capital investment in new chemical projects to beef up capacity. New capacity is expected to provide a boost to chemical production as these investments come on stream. The ACC expects gains in capital spending, rising 5.4% in 2019 and 4.9% in 2020.

4 Chemical Stocks Worth a Wager

The U.S. chemical industry’s upswing is expected to continue on strength across major end-markets and investment on capacity expansion. U.S. chemical makers should continue to reap the benefits of abundant and affordable shale gas feedstock. As such, it would be prudent to invest in stocks in the space that have compelling prospects and are well poised for solid upside.

We highlight the following four stocks with a 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.

Axalta Coating Systems Ltd. (AXTA - Free Report)

Pennsylvania-based Axalta sports a Zacks Rank #1. The company has expected earnings growth of 35.2% for 2019. Earnings estimates for 2019 have been revised 30% upward over the last 90 days. The company also delivered positive earnings surprise in three of the trailing four quarters, with an average positive surprise of 19.6%.

Westlake Chemical Partners LP (WLKP - Free Report)

Our next pick in the space is Texas-based Westlake Chemical Partners, carrying a Zacks Rank #1. The company has expected earnings growth of 39.7% for 2019. Earnings estimates for the current year have been revised 2.4% upward over the last 90 days. The stock also has an expected long-term earnings per share growth rate of 16%.

Compass Minerals International, Inc. (CMP - Free Report)

Kansas-based Compass Minerals is another attractive choice. It carries a Zacks Rank #2. The company has expected earnings growth of 35.8% for 2019. Moreover, earnings estimates for 2019 have been revised 5.2% upward over the last 90 days.

Air Products and Chemicals, Inc. (APD - Free Report)

Based in Pennsylvania, Air Products carries a Zacks Rank #2. It has an expected earnings growth of 10.3% for fiscal 2019. Earnings estimates for the current fiscal have been revised 0.5% upward over the last 90 days. The stock also has long-term expected earnings per share growth rate of 11.8%.

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