The Zacks Chemicals Diversified industry is hamstrung by a softer demand in certain markets, including consumer durables and building & construction, and consumer inventory destocking. Lower consumer spending due to inflationary pressures in Europe and a slow recovery in China are impacting demand.
Industry players like Air Products and Chemicals, Inc. APD, DuPont de Nemours, Inc. DD and Methanex Corporation MEOH are banking on strategic measures, including operating cost reductions and aggressive price hikes to tide over the challenging 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?
Demand Headwinds From End-market Softness: Companies in the chemical-diversified space are grappling with a slowdown in certain key markets. The sluggishness in the building & construction market and the destocking in consumer electronics are the key concerns. In North America, uncertainties surrounding the U.S. housing market are weighing on building & construction. Softer demand in industrial and consumer durables is hurting chemical volumes. Weaker global economic activities have led to a higher level of uncertainties, which may affect chemical volumes over the near term.
Slowdown in Europe and China a Concern: A slower recovery in economic activities in China following the lifting of the restrictions related to the resurgence in COVID-19 infections is hurting chemical demand in that country. Global industrial activities have been affected by a weaker demand recovery in China. The slowdown in Europe, resulting from the war in Ukraine and weaker consumer spending due to high levels of inflation and rising interest rates, has also led to softer demand in that region. The energy and feedstock inflation has resulted in reduced industrial production and consumer spending in Europe. The ongoing weakness in these key regions is likely to impact demand for chemicals over the short haul.
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 players are also raising selling prices to counter cost inflation. Such moves are likely to help the industry sustain margins amid the prevailing challenges.
Zacks Industry Rank Indicates Downbeat Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #223, which places it at the bottom 11% 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 gloomy 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 18% over this period compared with the S&P 500’s rise of 11.6% and the broader sector’s decline of 2.2%.
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 9.08X, below the S&P 500’s 12.59X and the sector’s 9.87X.
Over the past five years, the industry has traded as high as 13.15X, as low as 5.33X and at the median of 8.02, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Chemicals Diversified Stocks to Keep a Close Eye on
Air Products: Based in Pennsylvania, Air Products is a leading industrial gases company. The company is benefiting from investments in high-return projects, new business deals, acquisitions and productivity initiatives. It remains committed to its gasification strategy and is executing its growth projects. These projects are expected to be accretive to earnings and cash flows.
Air Products is also boosting productivity to improve its cost structure. It is seeing the positive impacts of its productivity actions. Benefits from additional productivity and cost improvement programs are likely to support its margins. APD has also been benefiting from higher pricing. Higher merchant demand is also driving its volumes.
Air Products, a Zacks Rank #3 (Hold) stock, has expected earnings growth of 11.4% for the current fiscal year. APD beat the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 1.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: APD
DuPont: Delaware-based DuPont provides technology-based materials and solutions to markets including electronics, transportation, construction and water. DuPont is expected to gain from its productivity and pricing actions. It continues to implement strategic price increases to offset cost inflation. These actions are likely to support its margins. Moreover, DD remains focused on driving growth through innovation and new product development. Its innovation-driven investment is focused on several high-growth areas. It remains committed to driving returns from its R&D investment.
DuPont, carrying a Zacks Rank #3, has a projected earnings growth rate of around 1.5% for the current year. DD also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 7.1%.
Price and Consensus: DD
Methanex: Vancouver-based Methanex is the world’s biggest supplier of methanol to major international markets. The Geismar 3 project will enhance the company’s asset portfolio and future cash generation and deliver long-term value to shareholders. Healthy methanol demand in traditional chemical applications also bodes well. MEOH is also committed to delivering excess cash to its shareholders in the form of dividends and share repurchases.
The Zacks Consensus Estimate for Methanex’s current-year earnings has been revised 15% upward over the past 60 days. The company, carrying a Zacks Rank #3, beat the Zacks Consensus Estimate in each of the trailing four quarters at an average of 53.4%.
Price and Consensus: MEOH
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