3 Chemical Specialty Stocks to Escape Industry Headwinds
The Zacks Chemicals Specialty industry is facing challenges from demand softness, largely 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 input, supply chain and logistics costs.
Industry players like Celanese Corporation CE, Axalta Coating Systems Ltd. AXTA and Element Solutions Inc ESI 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. 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 Downbeat Prospects
The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #208, which places it in the bottom 16% 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 16.5% over this period compared with the S&P 500’s rise of 20.9% and the broader sector’s decline of 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 10.86X, below the S&P 500’s 13.94X and the sector’s 11.37X.
Over the past five years, the industry has traded as high as 16.02X, as low as 7.10X, with a median of 10.59X, 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
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 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 has expected earnings growth of 16% for 2024. ESI’s earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 3.2%, on average. ESI currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ESI
Celanese: Texas-based Celanese is a leading producer of differentiated chemistry solutions and specialty materials used in most major industries and consumer applications. It is expected to benefit from its productivity measures, investments in high-return organic projects and strategic acquisitions. Celanese remains focused on executing its productivity programs, which include the implementation of a number of cost-reduction capital projects. CE also continues to actively pursue acquisitions, which are providing it opportunities for additional growth, investment and synergies. The acquisition of the majority of DuPont’s Mobility & Materials business has allowed CE to enhance its growth in high-value applications.
Celanese, carrying a Zacks Rank #3 (Hold), has expected earnings growth of 32.5% for 2024. It has a trailing four-quarter earnings surprise of roughly 3.8%, on average.
Price and Consensus: CE
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. The 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 has also strategically expanded its portfolio by acquiring Andre Koch AG, a well-established Refinish distribution partner headquartered in Switzerland.
Axalta, carrying a Zacks Rank #3, has an expected earnings growth rate of 21% for 2024. The Zacks Consensus Estimate for 2024 earnings of AXTA has been stable over the last 60 days. AXTA earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 6.7%, on average.
Price and Consensus: AXTA
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Element Solutions Inc. (ESI) : Free Stock Analysis Report
Celanese Corporation (CE) : Free Stock Analysis Report
Axalta Coating Systems Ltd. (AXTA) : Free Stock Analysis Report
