Yahoo Finance 3 Chemical Specialty Stocks to Gain From the Industry's Rebound
The Zacks Chemicals Specialty industry is expected to benefit from a demand recovery in key markets, including automotive and construction. Healthy industrial and manufacturing activities augur well for the industry.
Industry players like PPG Industries, Inc. PPG, Axalta Coating Systems Ltd. AXTA and Livent Corporation LTHM are poised to benefit from healthy demand. Strategic actions, including operating cost reductions, are also expected to help these companies navigate a still-challenging environment.
About the Industry
The Zacks Chemicals Specialty industry consists of manufacturers of specialty chemical products for a host of end-use markets such as textile, paper, automotive, electronics, personal care, energy, construction, food & beverages and agriculture. These chemicals (including catalysts, surfactants, specialty polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose. Specialty chemicals can be single molecules or a combination of molecules referred to as formulations, and they provide a vast range of effects upon which various industries rely. Their compositions significantly influence the performance of the finished products. Specialty chemicals have applications in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.
What's Shaping the Future of the Chemical Specialty Industry?
Improved End-Market Demand Augurs Well: Companies in the chemical specialty space are expected to gain from higher demand across several major industries — including automotive. Demand for specialty chemicals is expected to be supported by an uptick in global industrial and manufacturing activities. Demand in the automotive market has improved this year after sluggishness in 2022, further aided by a recovery in automotive production on improved supply of semiconductors and other key inputs. Automotive OEM production is expected to improve in 2023 with the easing of the chip supply shortage and the ramp-up of production in China, post lockdowns. Moreover, a recovery in the construction sector bodes well for specialty chemical companies. These companies are also seeing higher demand in electronics and agriculture end markets. Improved demand is likely to support volumes of these companies over the near term.
Self-Help Actions to Aid Results: The companies in this space are executing a raft of self-help measures — including cost-cutting and productivity improvement, expansion into high-growth markets, restructuring, operational efficiency improvement, and actions to strengthen the balance sheet and boost cash flows — in a bid to stay afloat amid the prevailing headwinds. Notably, the industry participants are aggressively implementing actions to cut costs. The measures are likely to help the companies sail through the ongoing challenges.
Input Cost Pressure a Worry: Specialty chemical makers are facing headwinds from raw material cost inflation, and supply-chain and freight transportation disruptions. The closure of a large swath of factories to stem the spread of the COVID-19 outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the chemical specialty industry. Some of the companies are also facing challenges from elevated logistics and labor costs. The shipping bottlenecks have led to a surge in freight costs. The Russia-Ukraine conflict and new lockdowns in China following a resurgence in coronavirus infections have put further pressure on the global supply chain. The lingering impacts of supply chain and logistic bottlenecks are expected to continue over the short haul and exert pressure on the margins of chemical specialty companies.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #125, which places it in the top 50% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a bright near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms S&P 500
The Zacks Chemicals Specialty industry has underperformed the Zacks S&P 500 composite while outperforming the broader Zacks Basic Materials sector over the past year.
The industry has gained 1.6% over this period compared with the S&P 500’s rise of 3.2% and the broader sector’s increase of 0.1%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing chemical stocks, the industry is currently trading at 10.47X, below the S&P 500’s 12.23X and above the sector’s 7.78X.
Over the past five years, the industry has traded as high as 15.62X, as low as 6.88X, with a median of 11.09X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Chemical Specialty Stocks to Keep a Close Eye on
PPG Industries: Based in Pennsylvania, PPG Industries is a global supplier of paints, coatings and specialty materials. The company is benefiting from cost savings from restructuring activities, pricing actions and synergies of strategic acquisitions. It is implementing a cost-cutting and restructuring strategy, as well as optimizing its working capital requirements. The cost savings generated by restructuring initiatives will act as a tailwind. The company is also undertaking measures to grow business inorganically through value-creating acquisitions. PPG also remains committed to maximizing shareholder returns.
PPG, carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 19.8% for the current year. The Zacks Consensus Estimate for earnings for the current year PPG has been revised 11.7% upward over the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: PPG
Axalta Coating Systems: Pennsylvania-based Axalta is a global coatings company engaged in the manufacturing, marketing and distribution of coatings solutions. AXTA is expected to benefit from higher average prices and improved volumes. Price and product mix benefits are supporting results in its Performance Coatings segment. Continued momentum in refinish is expected to offset weakness in industrial markets. Mobility Coatings business is also expected to be driven by a recovery in global automotive production, new business wins and strong pricing. Strong market demand is likely to drive volumes in this business.
Axalta, carrying a Zacks Rank #2, has an expected earnings growth rate of 2.7% for the current year. The Zacks Consensus Estimate for current-year earnings of AXTA has been revised 6.3% upward over the past 60 days.
Price and Consensus: AXTA
Livent: Pennsylvania-based Livent is a vertically integrated lithium producer. LTHM is benefiting from strong demand and higher lithium pricing, aided by strong market conditions. Lithium demand is being driven by higher electric vehicle sales and battery installations for EVs. Higher realized pricing is expected to drive the company’s top line and margins. Tight supply-demand conditions are supporting prices.
Livent, carrying a Zacks Rank #3 (Hold), has expected earnings growth of 42.1% for the current year. The company also surpassed the Zacks Consensus Estimate in each of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 22.1%, on average.
Price and Consensus: LTHM
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PPG Industries, Inc. (PPG) : Free Stock Analysis Report
Axalta Coating Systems Ltd. (AXTA) : Free Stock Analysis Report
Livent Corporation (LTHM) : Free Stock Analysis Report
