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 and agriculture. These chemicals (including catalysts, surfactants, speciality polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose. They have applications in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.
Some of the prominent industry players are Celanese Corporation (CE), W. R. Grace & Co. (GRA) and Ingevity Corporation (NGVT).
Here are the industry’s three major themes:
- Companies in the chemical specialty space are facing the heat from a significant downturn in demand across certain major industries including construction and automotive in the wake of the coronavirus pandemic. The contagion brought industrial activities to a grinding halt globally, sapping demand for specialty chemicals. Notably, these companies are witnessing a demand slowdown in China, a top consumer, as coronavirus-led disruptions hurt business activities in the country. Moreover, weak industrial and manufacturing activities due to lockdown restrictions have affected demand in North America and Europe. Disruptions in the supply chain and manpower shortage have put a brake on automotive production while project delays amid the pandemic have contributed to a slowdown in the construction sector. The difficult demand environment for specialty chemicals may persist in the near term amid a slowdown in industrial activities globally.
- Trade tariffs remain a drag on the chemical specialty industry. The United States and China have imposed billions of dollars in punitive tariffs on each others’ products. China’s tariffs on American products include a wide range of chemical products, including specialty chemicals. While the completion of the Phase I trade deal averted the implementation of a new round of tariff on chemicals, steep tariffs currently in place are already doing damage to the industry. China is among the most important trading partners of the American chemical industry and one of the biggest export markets for U.S. chemicals. Beijing’s retaliatory tariffs are hurting U.S. chemical exports.
- Specialty chemical makers are grappling with short supply of raw materials as a result of coronavirus. The closure of a large number of factories in China to blunt the spread of the outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the chemical specialty industry and pushed up prices of these inputs. Some of the companies are also facing challenges from elevated logistics costs. The supply disruption is likely to continue to affect chemical specialty companies over the short haul.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #153, which places it at the bottom 39% 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 gloomy 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for the current year has gone down 42.9%.
Despite the industry’s grim near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Outperforms Sector and S&P 500
The Zacks Chemicals Specialty industry has outperformed the broader Zacks Basic Materials sector as well as the Zacks S&P 500 composite over the past year. The industry has rallied 33.1% over this period compared with the S&P 500’s rise of 7.8% and the broader sector’s decline of 1.4%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of 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 31.18X, above the S&P 500’s 11.88X and the sector’s 9.78X.
Over the past five years, the industry has traded as high as 34.1X, as low as 14.71X, with a median of 22.35X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Coronavirus-induced disruptions have paralyzed industrial and economic activities globally, hurting demand for specialty chemicals. Margins of players in this space will also likely remain stressed over the near term amid an inflationary environment given raw material supply constraints resulting from the pandemic. The industry is also bearing the brunt of hefty trade tariffs.
We are presenting one stock with a Zacks Rank #1 (Strong Buy) and three stocks with a Zacks Rank #2 (Buy) that are well positioned to grow. You can see the complete list of today’s Zacks #1 Rank stocks here.
Green Plains Inc. (GPRE): The Nebraska-based company sports a Zacks Rank #1. It has expected earnings growth of 46.1% for the current year. The company also delivered an earnings surprise of 23.1%, on average, over the trailing four quarters.
Price and Consensus: GPRE
Ashland Global Holdings Inc. (ASH): The Zacks Consensus Estimate for this Kentucky-based company’s current-year earnings has gone up 1.4% in the last 60 days. The company, carrying a Zacks Rank #2, also has an estimated long-term earnings growth rate of 10.7%.
Price and Consensus: ASH
H.B. Fuller Company (FUL): The consensus EPS estimate for this Minnesota-based company has been revised 9.3% upward over the last 60 days. The company, carrying a Zacks Rank #2, also has an estimated long-term earnings growth rate of 7.8%.
Price and Consensus: FUL
Hawkins, Inc. (HWKN): This Minnesota-based company, carrying a Zacks Rank #2, has expected earnings growth of 12.8% for the current fiscal year. The consensus EPS estimate for the current fiscal has been revised 3.1% upward over the last 60 days.
Price and Consensus: HWKN
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Ingevity Corporation (NGVT) : Free Stock Analysis Report
Hawkins, Inc. (HWKN) : Free Stock Analysis Report
W.R. Grace Co. (GRA) : Free Stock Analysis Report
Green Plains, Inc. (GPRE) : Free Stock Analysis Report
H. B. Fuller Company (FUL) : Free Stock Analysis Report
Celanese Corporation (CE) : Free Stock Analysis Report
Ashland Global Holdings Inc. (ASH) : Free Stock Analysis Report
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