3 Chemical Specialty Stocks to Escape Industry Headwinds
The Zacks Chemicals Specialty industry is facing headwinds from sluggish demand, partly due to a slowdown in Europe and the lingering impacts of COVID-related restrictions on China’s economy. Margins of companies in this space also remain under pressure due to elevated supply chain, logistics and input costs.
Industry players like PPG Industries, Inc. PPG, Axalta Coating Systems Ltd. AXTA and Livent Corporation LTHM are banking on strategic measures, including operating cost reductions to tide over 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?
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. Moreover, the ongoing geopolitical tension, elevated energy costs and high inflation 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.
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 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.
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 Downbeat Prospects
The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #173, which places it in the bottom 31% 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 bleak 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 Sector & S&P 500
The Zacks Chemicals Specialty industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 10.1% over this period compared with the S&P 500’s rise of 11.6% and the broader sector’s increase of 14.9%.
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 11.65X, below the S&P 500’s 13.99X and above the sector’s 9.54X.
Over the past five years, the industry has traded as high as 15.77X, as low as 6.93X, with a median of 11.05X, 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
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 has expected earnings growth of 50.7% for the current year. The company also surpassed the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 22.1%, on average. LTHM currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: LTHM
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, carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 23.5% for the current year. The Zacks Consensus Estimate for earnings for the current year PPG has been revised 3% upward over the past 60 days.
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 5.4% for the current year. The Zacks Consensus Estimate for current-year earnings of AXTA has been revised 2% upward over the past 60 days.
Price and Consensus: AXTA
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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
