The chemical industry is among the industries that have been hardest hit by the fierce trade spat between the United States and China. The U.S. chemical industry, in particular, is caught in the crosshairs of the year-long trade conflict.
The Trump administration slapped punitive tariffs on $250 billion worth of Chinese products last year while China has imposed retaliatory tariffs on $110 billion in U.S. goods. China’s tariffs on American products include a wide range of petrochemicals, specialty chemicals and plastics. The U.S. administration, in May 2019, also proposed a new round of tariffs on $300 billion worth of Chinese imports that include chemicals and plastics products.
The United States and China, last month, agreed to a tentative trade truce at the G20 Summit in Japan that could potentially resolve the trade dispute between the world’s two biggest economies. Washington and Beijing agreed to resume trade talks after President Trump agreed to hold back from imposing new tariffs on an additional $300 billion worth of Chinese goods.
However, the tariffs currently in place are already doing harm to the U.S. chemical industry. China is one of the biggest export markets for U.S. chemicals. Beijing’s retaliatory tariffs have created an uncertain demand environment for U.S. chemical products in this significant market. The tariffs are hurting U.S. chemical exports.
Chemical makers are also seeing demand weakness in China associated with the U.S.-China trade war 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. Trade war and a slowdown in the automotive industry are hurting the European chemical industry.
Notwithstanding the challenges, the chemical industry is poised for an upswing in 2019. In particular, prospects for the U.S. chemical industry appear upbeat, driven by strength in the U.S. economy, healthy industrial activities and continued strong demand across construction and automotive end markets.
The American Chemistry Council ("ACC"), a leading industry trade group, expects expansion of the domestic chemical industry to continue this year despite a challenging world economy. The trade group expects the U.S. chemical industry to grow 2.5% in 2019.
Growth is expected to be spurred by strength across major chemical end-use markets and significant shale gas-linked investment on capacity expansion. While the automotive sector is expected to remain at high levels, slow recovery in the housing market is expected to continue.
Expectations for Q2
Per the Zacks Industry classification, the chemical industry is under the broader Basic Materials sector. Earnings picture for the Basic Materials sector for the second quarter looks glum. The sector is among the Zacks sectors that are expected to see a double-digit decline in earnings in the June quarter. Overall earnings for the sector are projected to fall 34.2% on 10% lower revenues, per the latest Earnings Outlook.
Chemical companies are expected to face some demand weakness in the second quarter. Trade conflict has led to a slowdown in industrial activities across Asia and Europe, hurting demand for chemicals and plastics. Chemical makers also face headwinds from a spike in costs of raw materials. Some of these companies are also exposed to challenges from elevated logistics costs.
Nevertheless, chemical makers should benefit from strategic measures, including cost-cutting and productivity improvement and actions to raise selling prices. A number of companies are taking aggressive price increase actions in the wake of raw material cost inflation. These actions will likely support their margins in the second 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 June quarter.
Picking the Winning Stocks
Companies in the chemical space face headwinds from a slowing global economy, cost inflation and some demand weakness amid the trade tiff. However, strategic measures including productivity improvement and price hike actions are likely to aid the performance of chemical makers in the second 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 second-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 10% 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.
4 Chemical Stocks to Buy
Below we discuss four chemical stocks that are worth investing in before the second-quarter earnings season hits full throttle.
Flexible Solutions International Inc. (FSI - Free Report)
Canada-based Flexible Solutions sports a Zacks Rank #1. The company has an expected EPS growth of 50% for the second quarter. It also has an expected EPS growth of 342.9% for 2019. Earnings estimates for the current year have been revised 63.2% upward over the last 90 days.
Axalta Coating Systems Ltd. (AXTA - Free Report)
Our next pick in the space is Pennsylvania-based Axalta sporting a Zacks Rank #1. It has an expected EPS growth of 22.2% for the second quarter. The company also has expected EPS growth of 35.9% for 2019. Earnings estimates for 2019 have been revised 30.8% 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%.
Israel Chemicals Ltd. (ICL - Free Report)
Tel Aviv-based Israel Chemicals, carrying a Zacks Rank #1, has an expected EPS growth of 22.2% for the second quarter. Moreover, it has an expected EPS growth of 13.5% for the current year. The company also delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 13.7%.
Innospec Inc. (IOSP - Free Report)
Colorado-based Innospec carries a Zacks Rank #2. It has an expected EPS growth of 12% for the second quarter. Moreover, the company delivered positive earnings surprise in three of the trailing four quarters, with an average positive surprise of 9.1%. The company also has an expected EPS growth of 6.6% for the current year. Earnings estimates for the current year have been revised 3% upward over the last 90 days.
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