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4 Chemical Specialty Stocks to Escape Industry Challenges

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Anindya Barman
·9 min read
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The Zacks Chemicals Specialty industry is reeling under the effects of demand shocks as a result of sluggish global industrial activities amid the coronavirus pandemic. Margins of companies in this space also remain stressed due to elevated logistics and input costs. The industry is also bearing the brunt of hefty trade tariffs.

Industry players like Quaker Chemical Corporation (KWR), Valvoline Inc. (VVV), Element Solutions Inc (ESI) and Ingevity Corporation (NGVT) are banking on strategic measures, including operating cost reductions in a bid to stay afloat amid pandemic-induced challenges.

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 and agriculture. These chemicals (including catalysts, surfactants, speciality polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose. They 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?

Subdued End-market Demand: Companies in the chemical specialty space are facing the heat from subdued demand across certain major industries including construction and automotive, in the wake of the pandemic. Shutdowns and travel restrictions to blunt the spread of infection have paralyzed industrial and economic activities globally, sapping demand for specialty chemicals. While an economic rebound in China has led to a recovery in demand there, weak industrial activities due to lockdown restrictions are still affecting demand in North America and Europe. Although automotive production has rebounded from coronavirus-led shutdowns, demand in the space is unlikely to return to pre-pandemic levels anytime soon. The construction sector has also recovered somewhat on restart of projects that were stalled earlier. However, demand in this market is not expected to return to normal in the near term. With the pandemic showing no sign of abating, the difficult demand environment for specialty chemicals is likely to persist amid depressed industrial activities globally.

Trade Tariffs Remain a Drag: Trade tariffs have plagued the chemical specialty industry. The United States and China have imposed billions of dollars in punitive tariffs on each others’ products. China’s tariffs on American products include a wide range of chemical products, including specialty chemicals. While the completion of the Phase I trade deal averted the implementation of a new round of tariff on chemicals, steep tariffs currently in place are already doing damage to the industry. China is among the most important trading partners of the American chemical industry and one of the biggest export markets for U.S. chemicals. Beijing’s retaliatory tariffs are hurting U.S. chemical exports.

Input and Logistic Cost Pressure: Specialty chemical makers are grappling with short supply of raw materials as a result of coronavirus. The closure of a large number of factories in China to stem the spread of the outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the chemical specialty industry and pushed up prices of these inputs. Some of the companies are also facing challenges from elevated logistics costs. The supply disruption is likely to continue to affect chemical specialty companies over the short haul.

Self-help Actions to Aid Results: The companies in this space are taking a host of strategic measures including cost-cutting and productivity improvement, expansion into high-growth markets, restructuring, operational efficiency improvement, and actions to strengthen balance sheet and boost cash flows to tide over the challenging environment. Notably, the industry participants including Celanese Corporation (CE) and Ashland Global Holdings Inc. (ASH) are aggressively implementing actions to cut costs. The measures are likely to help these companies to sail through the tough times.

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 #167, which places it at the bottom 34% 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 Lags Sector and S&P 500

The Zacks Chemicals Specialty industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.

The industry has gained 5.7% over this period compared with the S&P 500’s rise of 14% and the broader sector’s increase of 12.6%.

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 28.58X, above the S&P 500’s 15.83X and the sector’s 10.18X.

Over the past five years, the industry has traded as high as 35.74X, as low as 14.55X, with a median of 22.43X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 

 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 

 

 

4 Chemical Specialty Stocks to Keep a Close Eye on

Quaker Chemical: Pennsylvania-based Quaker Chemical makes and markets a range of formulated specialty chemical products for various heavy industrial and manufacturing applications. The company's combination with Houghton International, Inc. and the acquisition of the operating divisions of Norman Hay plc are expected to drive its top line. It is also expected to benefit from cost-saving actions, integration synergies, improvement in product margins, and healthy cash flows in the challenging environment.

The company currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings has been revised 23.6% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 50.3%. Moreover, its shares have shot up around 48% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: KWR

 

 

 

Valvoline: Kentucky-based Valvoline is a producer and distributor of automotive, commercial and industrial lubricants as well as automotive chemicals. Improving miles driven trends, following the easing of pandemic-related restrictions are expected to drive its top line. The company should also benefit from its cost-reduction program, strategic acquisitions and investments in the expansion of its Quick Lubes network.

Valvoline currently has a Zacks Rank #2. The Zacks Consensus Estimate for the current year has been revised 4.7% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 20.8%. The company’s shares are also up around 25% over the past six months.

Price and Consensus: VVV

 

 

 

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. The company is expected to gain from healthy demand in its high-end electronics business and the rebound in the automotive industry. It is also implementing a number of cost-containment measures including reduction of traveling costs. These actions are likely to support its margins in 2020.

The company currently carries a Zacks Rank #2. It surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 18.4%. The consensus estimate for the current year has been revised 4.8% upward over the last 60 days. The stock is also up roughly 21% over the past six months.

Price and Consensus: ESI

 

 

Ingevity Corporation: South Carolina-based Ingevity is a producer of high-performance activated carbon materials and specialty chemicals. Ingevity is gaining from growth in its applications driven by regulations and technology adoption. The company is benefiting from higher sales in China as automakers in the country have completed the implementation of the China 6 standard. Moreover, Ingevity is seeing higher sales for its pavement technologies. The company is also taking certain cost-reduction measures in the wake of the coronavirus pandemic to boost profitability. The acquisition of the Capa caprolactone business has also enabled Ingevity with a new technology platform to drive revenue and earnings growth.

The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for the current year has been revised 18.5% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 32.1%. Moreover, its shares have shot up around 46% over the past six months.

Price and Consensus: NGVT

 

 

 

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Valvoline Inc. (VVV) : Free Stock Analysis Report
 
Ingevity Corporation (NGVT) : Free Stock Analysis Report
 
Quaker Chemical Corporation (KWR) : Free Stock Analysis Report
 
Element Solutions Inc (ESI) : Free Stock Analysis Report
 
Celanese Corporation (CE) : Free Stock Analysis Report
 
Ashland Global Holdings Inc. (ASH) : Free Stock Analysis Report
 
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