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3 Stocks to Buy in a Prospering Chemical Plastics Industry

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The Zacks Chemicals Plastics industry is benefiting from strong industrial demand, driven by global economic expansion. The upturn in demand across major end-use industries such as automotive, tire and building & construction from the pandemic-led slump bodes well for the industry.

Westlake Corporation WLK, Covestro AG COVTY and Victrex plc VTXPF are well positioned to gain from the strong demand fundamentals. Strategic measures, including the reduction of operating costs, are also helping these companies to offset the pandemic-driven headwinds. The shale boom, too, is driving investments in capacity expansion in the United States.

About the Industry

The Zacks Chemicals Plastics industry consists of manufacturers of polymer materials for a host of end-use markets such as packaging, building & construction, transportation, electronics, containers and aerospace. These products include plastic resins such as polyethylene, polypropylene, polyvinyl chloride (“PVC”) and polystyrene that are made from raw materials sourced from crude oil and natural gas. Packaging and construction industries remain the mainstays of the chemical plastics industry. Building & construction is a major market for PVC. Automotive is an important consuming sector of polyethylene and polypropylene with several applications, including bumpers, batteries, interior linings, seats and different types of tanks. Polyethylene is also widely used in the packaging market for applications in films, bags, bottles and other packaging materials.

What's Shaping the Future of the Chemical Plastics Industry?

Strong Demand in Major End-markets: Coronavirus led to a slowdown in global industrial activities for most of the first half of 2020, squeezing demand for plastics in key end-use markets including automotive, tire, construction and textile. However, demand started to pick up from the third quarter of 2020 with a rebound in industrial and manufacturing activities globally from the pandemic-induced slowdown, and the recovery continued in 2021. Demand for PVC resin has strengthened with the revival in the construction sector, following the easing of lockdowns and restrictions. The strength in the residential construction market is driving demand for PVC globally. Demand for polyethylene — the most widely consumed polymer globally — also remains strong in consumer product packaging, automotive, healthcare and tire applications. The pandemic has led to a surge in demand for food packaging, thanks to the rise in the consumption of packed products. Higher industrial activities are expected to spur demand for plastic products over the near term.

Strategic Actions to Aid Margins: The companies in this space are taking a host of self-help measures, including structural cost reduction, operational efficiency improvement and working capital management, amid a still-challenging environment. In order to whittle down costs, the industry participants are aggressively implementing actions, which include reducing discretionary spending and traveling expenses. These companies are also taking price hike measures to counter a significant spike in raw material costs due to the supply-chain disruptions, and logistics cost inflation. These moves are likely to help the industry in sustaining margins amid the prevailing challenges.

Shale Bounty Driving Capacity Expansion: The U.S. chemical plastics industry is enjoying the advantage of access to abundant and cheap ethane feedstock extracted from shale gas. The shale bounty has provided U.S. plastics producers a compelling cost advantage over their global counterparts, which use oil-based feedstock such as naptha. This is driving investment in plastic production projects in the U.S. Gulf Coast to beef up capacity. The shale boom has incentivized a number of companies to plow billions of dollars for setting up crackers in the United States to make key feedstock like ethylene and propylene in a cost-effective way. Such investments should boost capacity.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Chemicals Plastics industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #27, which places it at the top 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 an upbeat 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 Outperforms Sector and S&P 500

The Zacks Chemicals Plastics industry has outperformed the broader Zacks Basic Materials sector and the Zacks S&P 500 composite in the past year.

The industry has gained 44.5% against the S&P 500’s rise of 14.9% and the broader sector’s growth 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 5.02X, below the S&P 500’s 14.73X and the sector’s 6.42X.

Over the past five years, the industry has traded as high as 11.71X, as low as 4.07X, with a median of 7.12X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

Enterprise Value/EBITDA (EV/EBITDA) Ratio

3 Chemical Plastics Stocks to Keep a Close Eye on

Westlake: Texas-based Westlake, sporting a Zacks Rank #1 (Strong Buy), is an international producer and supplier of petrochemicals, polymers and building products. The company is gaining from higher demand in its polyethylene business in specialty applications, especially consumer product packaging, and strength in global demand for PVC resin. WLK is seeing strong demand and pricing for PVC resin on the back of continued strength in the residential construction market and strong repair and remodeling markets. It is also benefiting from its investment in capacity expansion projects, synergies of acquisitions, and actions to improve operating efficiency and reduce costs.

Westlake has an expected earnings growth rate of 8.5% for the current year. The Zacks Consensus Estimate for WLK’s earnings for the current year has been revised 12.9% upward over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price: WLK

Covestro: Germany-based Covestro, carrying a Zacks Rank #3 (Hold), makes and markets high-quality polymers for various industries worldwide. COVTY is benefiting from a rebound in automotive and construction end-use markets. Its cost-saving actions are also lending support to its margins. The acquisition of Royal DSM’s Resins & Functional Materials business also expands the company’s portfolio in the attractive growth market for sustainable coating resins and provides considerable synergies.

Covestro has an expected earnings growth rate of 238.7% for the current year. The Zacks Consensus Estimate for its current-year earnings has been unchanged at $4.81 over the past 30 days. COVTY has an expected long-term earnings per share growth rate of 33.7%.

Price: COVTY

Victrex: UK-based Victrex, carrying a Zacks Rank #3, engages in the manufacture and marketing of polymers. VTXPF is expected to benefit from improved demand across automotive, medical and electronics markets from the pandemic-led slowdown. Continued recovery in these markets is likely to drive its sales volumes. Cost-management actions and improved asset utilization are also expected to support its bottom line.

Victrex has an expected earnings growth rate of 15.8% for the current fiscal year. The consensus estimate for VTXPF’s current fiscal year earnings has declined by a penny to $1.32 per share over the past 30 days.

Price: VTXPF

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Westlake Corp. (WLK) : Free Stock Analysis Report

Victrex PLC (VTXPF) : Free Stock Analysis Report

Covestro AG Sponsored ADR (COVTY) : Free Stock Analysis Report

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