3 Chemical Specialty Stocks to Escape Industry Challenges
The Zacks Chemicals Specialty industry is facing headwinds from sluggish demand, partly due to a slowdown in Europe and a slow economic recovery in China. Margins of companies in this space also remain under pressure due to the still-elevated supply chain, logistics and input costs.
Industry players like PPG Industries, Inc. PPG, Element Solutions Inc ESI and Hawkins, Inc. HWKN are banking on strategic measures, including operating cost reductions, to tide over a persistently 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?
Headwinds From Demand Slowdown: Companies in the chemical specialty space face headwinds from customer destocking and softness in building and construction and industrial end markets, especially in Europe and China, due to the economic slowdown. New lockdowns following a resurgence in coronavirus infections have taken a significant toll on China’s economy. A slower recovery in economic activities in China following the lifting of restrictions is hurting demand in that country. Moreover, the ongoing geopolitical tension, high inflation and rising interest rates have resulted in a decline in demand in Europe. A weak automotive market in China is also a concern. The demand slowdown is expected to weigh on volumes of chemical specialty companies over the short term.
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. The Russia-Ukraine conflict and new lockdowns in China put further pressure on the global supply chain. These affected the availability of key raw materials for the chemical specialty industry. Some companies are also facing challenges from elevated logistics and labor costs. 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 haul and weigh on the margins of chemical specialty companies.
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.
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 #236, which places it in the bottom 6% 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.
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 17.5% over this period compared with the S&P 500’s rise of 19.8% and the broader sector’s increase of 15.3%.
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 10.16X, below the S&P 500’s 13.09X and the sector’s 10.41X.
Over the past five years, the industry has traded as high as 16.02X, as low as 7.10X, with a median of 10.65X, 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 expand business inorganically through value-creating acquisitions. PPG also remains committed to maximizing shareholder returns.
PPG Industries, carrying a Zacks Rank #3 (Hold), has an expected earnings growth rate of 23.8% for the current year. PPG’s earnings beat the Zacks Consensus Estimate in each of the last four quarters at an average of roughly 8.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: PPG
Element Solutions: Based in Florida, Element Solutions is a leading specialty chemicals provider offering innovative and differentiated solutions to its customers across a vast spectrum of industries. Element Solutions has been executing various reorganization and cost management measures that have contributed to cost savings and profits. Continued cost discipline and other strategic actions are expected to support margins and act as tailwinds. ESI also remains focused on growing through strategic acquisitions. The recent Kuprion acquisition adds a highly differentiated capability to the company's portfolio, as well as a world-class R&D and application team.
Element Solutions carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for the current year for ESI has been revised 0.8% upward over the last 60 days. The company has a trailing-four quarter earnings surprise of 1.1%, on average.
Price and Consensus: ESI
Hawkins: Minnesota-based Hawkins is a leading specialty chemical and ingredients company that formulates, distributes, blends, and manufactures products for its customers. It is seeing strong growth in its Water Treatment segment, reflecting the company's strategic emphasis on the water treatment sector, including the successful integration of recent acquisitions, such as EcoTech Enterprises. These moves have solidified the company's position in the water treatment market. Its judicious pricing strategy to counter cost inflation is also supporting results. HWKN also remains committed to enhancing shareholders’ value.
Hawkins, carrying a Zacks Rank #3, has expected earnings growth of 18.9% for the current fiscal year. The Zacks Consensus Estimate for HWKN’s earnings for the current fiscal has been stable over the last 60 days. The company also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 25.6%.
Price and Consensus: HWKN
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PPG Industries, Inc. (PPG) : Free Stock Analysis Report
Element Solutions Inc. (ESI) : Free Stock Analysis Report
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