Yahoo Finance 4 Diversified Chemical Stocks to Gain From Demand Rebound
The Zacks Chemicals Diversified industry is poised to benefit from a recovery in demand in certain key markets, including consumer durables and building & construction, as the prolonged customer inventory de-stocking that hurt the industry for most of 2023 has largely ended.
Eastman Chemical Company EMN, Avient Corporation AVNT, Innospec Inc. IOSP and Kronos Worldwide, Inc. KRO are well-placed to benefit from the rebound in demand. Strategic measures, including operating cost reductions and aggressive price hikes, are also helping these companies to tide over the still-challenging macroeconomic environment.
About the Industry
The Zacks Chemicals Diversified industry consists of manufacturers of basic chemicals, plastics, specialty chemicals and agricultural chemicals. Companies in this space serve a host of end markets, such as automotive, building & construction, transportation, electronics, aerospace and agriculture. Basic chemicals are produced in large quantities, and include petrochemicals and intermediates (such as ethylene, propylene and benzene), polymers (including plastic resins such as polyethylene, polypropylene and polyvinyl chloride), and inorganic chemicals (such as chlorine, caustic soda and titanium dioxide). Specialty chemicals that include catalysts, specialty polymers and coating additives are used in specific fields based on their performance. Agricultural chemicals include herbicides, fungicides and insecticides that are used to protect crops from disease, pests and weeds.
What's Shaping the Future of the Chemicals Diversified Industry?
End-market Demand Recovery Bodes Well: Companies in the chemical-diversified space are expected to benefit from an uptick in demand in certain key markets from the lows witnessed last year. Chemical demand in the automotive market has picked up, aided by a recovery in automotive production on the back of improved supply of semiconductors and other key inputs. Automotive OEM production is expected to rise in 2024 with the easing of the chip supply shortage, supported by the growth in China. The resolution to the six-week United Auto Workers strike also augurs well for chemical demand in automotive. Moreover, chemical companies are seeing a recovery in demand across the construction and electronics markets. Demand in the healthcare market also remains steady. Meanwhile, industrial production is picking up pace in China, underscoring improving conditions. Moderating inflation is also likely to support the demand recovery in Europe. On a further positive note, customer inventory de-stocking in building & construction and consumer durables is nearing completion, leading to low inventory levels. This is expected to result in an increase in chemical demand and volumes this year.
Strategic Actions to Aid Results: The companies in this space are taking a host of strategic measures, including cost-cutting and productivity improvement, operational efficiency improvement and actions to strengthen the balance sheet and boost cash flows. In particular, the industry participants are aggressively implementing actions to bring down costs. These include the reduction of discretionary spending. The industry participants are also raising selling prices to counter cost inflation. Such moves are likely to help the industry sustain margins amid the prevailing challenges.
Cost Pressure Still a Concern: The industry players are still exposed to cost pressure associated with raw materials. These companies also face challenges arising from freight transportation disruptions. The disruption in the supply chain pushed up the prices of key inputs. Russia's invasion of Ukraine and new government-mandated lockdowns in China put more pressure on the global supply chain. These companies are also facing headwinds from elevated energy costs in certain regions. While raw material costs have moderated somewhat lately, driven by the easing of supply-chain disruptions, they remain higher than the pre-pandemic levels. The lingering impacts of inflationary pressures are expected to continue over the short term, hurting the margins of diversified chemical companies.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #93, which places it in the top 37% 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 bright near-term prospects. 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 Sector & S&P 500
The Zacks Chemicals Diversified industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has declined 5.2% over this period compared with the S&P 500’s rise of 25.8% and the broader sector’s increase of 5.4%.
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 9.85X, below the S&P 500’s 14.66X and the sector’s 11.47X.
Over the past five years, the industry has traded as high as 13.15X, as low as 5.33X and at the median of 8.49X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 Chemicals Diversified Stocks to Keep a Close Eye on
Eastman Chemical: Tennessee-based Eastman Chemical is a specialty materials company offering a broad range of products, including polymers, performance films, specialty plastics, high-value additives, plasticizers and fibers, in attractive end markets. It is gaining from its innovation-driven growth model, operational execution and cost-management actions. The company remains focused on increasing new business revenues by utilizing its innovation-driven growth strategy. Pricing initiatives are also expected to support the company’s bottom line. EMN is also expected to benefit from lower operating costs from its operational transformation program. Moreover, it remains focused on maintaining a disciplined approach to capital allocation.
Eastman Chemical, carrying a Zacks Rank #2 (Buy), has expected earnings growth of 20.5% for 2024. EMN beat the Zacks Consensus Estimate in each of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 9.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: EMN
Avient: Ohio-based Avient, carrying a Zacks Rank #2, offers specialized and sustainable material solutions. It is benefiting from the strength in sustainable solutions, diversified end markets, favorable margins and cost-reduction actions. It is expected to gain from improving demand in packaging and consumer markets as de-stocking has ended in these major end markets. The buyout of the protective materials business of DSM (including the Dyneema brand) is also expected to contribute to its performance. Dyneema expanded AVNT’s portfolio of advanced composite and engineered fiber materials and provided new opportunities for growth.
Avient has expected earnings growth of 8.1% for 2024. The Zacks Consensus Estimate for its current-year earnings has been revised 0.8% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, AVNT has delivered an average earnings surprise of roughly 7.1%.
Price and Consensus: AVNT
Innospec: Colorado-based Innospec makes and markets a wide range of specialty chemicals to markets in the Americas, Europe, the Middle East, Africa and Asia-Pacific. Innospec, carrying a Zacks Rank #2, is expected to benefit from the strength of its Oilfield Services unit and strategic growth initiatives. The acquisition of QGP Quimica Geral in Brazil marks a significant expansion of its global footprint, bolstering manufacturing capabilities and customer service in South America. Expansion in production capacity is also anticipated to unlock further potential, with new contracts in personal care bolstering the Performance Chemicals division. Moreover, advancements in technologies offer solid prospects for the Fuel Specialties unit.
Innospec has expected earnings growth of 11.2% for 2024. The consensus estimate for IOSP’s earnings for 2024 has been revised upward by 0.7% over the last 60 days. It beat the Zacks Consensus Estimate for earnings in each of the last four quarters at an average of 10.5%.
Price and Consensus: IOSP
Kronos Worldwide: Texas-based Kronos, carrying a Zacks Rank #2, is a leading international producer of titanium dioxide (TiO2) products. It is expected to gain from higher demand for TiO2. Stronger demand for TiO2 in primary markets of Europe and North America is likely to drive its sales volumes. KRO is also expected to benefit from easing pricing pressure this year. Reduced energy costs, along with cost-reduction initiatives, are expected to support margins.
Kronos Worldwide has expected earnings growth of 176.7% for 2024. The Zacks Consensus Estimate for KRO’s earnings for 2024 has been revised upward by 312.5% over the last 60 days.
Price and Consensus: KRO
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Eastman Chemical Company (EMN) : Free Stock Analysis Report
Kronos Worldwide Inc (KRO) : Free Stock Analysis Report
Innospec Inc. (IOSP) : Free Stock Analysis Report
Avient Corporation (AVNT) : Free Stock Analysis Report
