Weak demand resulting from a downturn in industrial activities due to the U.S.-China trade conflict and the global slowdown that had plagued companies in the chemicals space in the September quarter is likely to have continued in Q4.
Trade issues have led to a slowdown in industrial activities globally, hurting demand for chemicals and plastics. Also, demand remains soft in certain key chemical end-use market such as automotive, electronics and agriculture. In particular, chemical makers are seeing soft demand in China, a major consumer, amid sluggish economy in that country. The automotive market in China has slowed considerably owing to the trade conflict, with sales dropping in December for the 18th straight month. Moreover, chemical demand in the United States has been hit by a downslide in the domestic manufacturing sector, which contracted for the fifth month in a row in December amid trade tensions. Factory activity in the Eurozone also shrank for the 11th straight month in December. Lower industrial demand and a weak global business environment are likely to have hurt sales volumes and revenues of chemical companies in the December quarter. Moreover, Q4 is a seasonally slow quarter and may have contributed to volume weakness. Companies in the chemical space are also likely to have faced headwinds from elevated raw materials costs, driven by a spike in crude oil prices. As such, Q4 results are expected to reflect some impacts of input cost inflation. Amid a challenging operating backdrop, industry participants remain focused on strategic measures, including cost-cutting and productivity improvement. A number of companies in this space including Celanese Corporation CE and Eastman Chemical Company EMN have also been taking aggressive price increase actions amid an inflationary environment. Chemical companies also remain actively focused on acquisitions to diversify and drive growth. Benefits of these actions might reflect on their Q4 results. Expectations for Q4 The chemical industry is housed within the broader Zacks Basic Materials sector. The Q4 earnings picture for the Basic Materials sector looks bleak as it is among the Zacks sectors that are expected to see a double-digit decline in earnings in the December quarter. Overall earnings for the sector are projected to fall 22.1% on 8.4% lower revenues, per the latest Earnings Outlook. How to Pick Winners? Given the large number of players operating in the chemical space, picking the right stocks is apparently not an easy task. But our proprietary methodology makes it fairly simple. One can trim down the list with the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Zacks Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter. Earnings ESP — the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate — is our proprietary methodology for determining stocks that have high chances of delivering earnings surprises in their next announcements. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as much as 70%. Our Choices Below we list three chemical stocks that have the right combination of elements to pull off positive surprises this earnings season: Univar Solutions Inc. UNVR has an Earnings ESP of +4.62% and carries a Zacks Rank #3. The company beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, delivering an average positive surprise of around 11.2%. The consensus mark for earnings has increased 17.9% to 33 cents over the past 30 days. The company is scheduled to report Q4 results on Feb 25.
AgroFresh Solutions, Inc. AGFS has an Earnings ESP of +8.57% and carries a Zacks Rank #3. The Zacks Consensus Estimate for the company’s Q4 earnings is pegged at 18 cents. It is expected to report Q4 results on Mar 9. You can see . the complete list of today’s Zacks #1 Rank stocks here
LyondellBasell Industries N.V. ( LYB Quick Quote LYB - Free Report) has an Earnings ESP of +2.66% and a Zacks Rank #3. The Zacks Consensus Estimate for the company’s Q4 earnings is pegged at $2.26, indicating 23.5% growth from the prior-year quarter’s reported number. The consensus mark for earnings has increased 0.4% over the past 30 days. The company is slated to report Q4 results on Jan 31.
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