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5 Chemical Stocks Likely to Outshine Q4 Earnings Estimates

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·7 min read
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Chemical companies’ fourth-quarter results are expected to reflect the uptick in demand across major end-use industries from the pandemic-led slump. Lockdowns and restrictions by governments around the world, in response to the pandemic, halted industrial activities through the first half and gutted demand for chemicals in key end-use markets including automotive, construction and electronics. In particular, disruptions due to coronavirus hurt industrial activities in China, a top consumer of chemicals.

The chemical industry also faced challenges from a short supply of raw materials and higher logistics costs as the contagion put a crimp on supply chains globally and impaired logistics. Moreover, softer end-market demand along with a sharp contraction in oil prices exerted pressure on the product prices of chemical makers.

However, demand for chemicals started to improve from the third quarter, aided by a rebound in industrial and manufacturing activities globally from the coronavirus-led slowdown. Demand picked up with the easing of restrictions on business activities and an economic rebound in China.

A recovery in construction and automotive markets is likely to have spurred up demand for chemicals in the December quarter. Improved industrial demand is likely to have provided support to sales volumes and the top line of chemical companies in the fourth quarter.

The automotive sector has witnessed accelerated recovery following the pandemic-led slump on the back of a strong rebound in customer demand for new vehicles. Global automotive production has rebounded from shutdowns due to significant disruptions in supply chains resulting from coronavirus. The recovery of the automotive industry that started in the second quarter of 2020 gained momentum through the third and fourth quarters on an uptick in demand. Pent-up demand and the shift toward private transportation amid the pandemic are driving new car sales globally.

The construction sector has also recovered on the resumption of projects that were stalled earlier partly due to supply chain disruptions. Residential construction is picking up around the world, supported by lower interest rates.

Against a still-challenging backdrop, chemical makers remain focused on self-help 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. A number of companies in this space have also been taking price increase actions to counter cost inflation. Chemical companies also remain actively focused on acquisitions to diversify and drive growth. The benefits of these actions might reflect on their fourth-quarter results.

Companies in this space are also expected to have gained from higher demand for chemicals and materials across healthcare and packaging markets, thanks to coronavirus. With a surge in the number of coronavirus cases globally, demand for health, hygiene and safety products, including PPE and disinfectants, has grown by leaps and bounds.

Expectations for Q4

The chemical industry is housed within the broader Zacks Basic Materials sector. The fourth-quarter earnings picture for the Basic Materials sector looks upbeat. Overall earnings for the sector are projected to rise 11.1% on 2.4% lower revenues, per the latest Earnings Trends. The projections reflect an improvement from an 11.5% decline in earnings on an 8.2% drop in revenues witnessed in the third quarter.

How to Pick Winners?

Given the large number of players operating in the chemical space, picking the right stocks is apparently not an easy task. But our proprietary methodology makes it fairly simple. One can trim down the list with the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Zacks Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.

Earnings ESP — the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate — is our proprietary methodology for determining stocks that have high chances of delivering earnings surprises in their next announcements. Our research shows that for stocks with this combination, the chance of an earnings surprise is as much as 70%.

Our Choices

Below we list five chemical stocks that have the right combination of elements to pull off earnings surprises this earnings season:

LyondellBasell Industries N.V. LYB has an Earnings ESP of +3.40% and carries a Zacks Rank #2. The company is scheduled to report fourth-quarter results on Jan 29. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for fourth-quarter earnings has been revised 7.1% upward over the last 60 days. The company is likely to have benefited from higher global demand for polyethylene. Higher demand from automotive manufacturing and other durable goods markets is likely to have aided its performance in the fourth quarter.

LyondellBasell Industries N.V. Price and EPS Surprise

LyondellBasell Industries N.V. Price and EPS Surprise
LyondellBasell Industries N.V. Price and EPS Surprise

LyondellBasell Industries N.V. price-eps-surprise | LyondellBasell Industries N.V. Quote

Olin Corporation OLN has an Earnings ESP of +80.77% and a Zacks Rank #2. It is scheduled to report fourth-quarter results on Jan 28.

The Zacks Consensus Estimate for fourth-quarter earnings has been revised 44% upward over the last 60 days. Higher pricing for chlorine, epoxy resins, ethylene dichloride, bleach and chlorinated organics are expected to have supported the company's margins in the fourth quarter. Benefits of actions to improve cost structure and efficiency, and drive productivity are also expected to get reflected on its results.

Olin Corporation Price and EPS Surprise

Olin Corporation Price and EPS Surprise
Olin Corporation Price and EPS Surprise

Olin Corporation price-eps-surprise | Olin Corporation Quote

Orion Engineered Carbons S.A. OEC has an Earnings ESP of +22.33% and a Zacks Rank #2. It is slated to report fourth-quarter results on Feb 18.

The consensus estimate for fourth-quarter earnings has been revised 17.2% upward over the last 60 days. The company is likely to have benefited from a recovery in rubber and specialty carbon black demand from the pandemic-led downturn, which is expected to have supported volumes in the fourth quarter. A sharp rebound in replacement tire and automotive original equipment manufacturer markets are expected to have driven volumes in its rubber business.

Orion Engineered Carbons S.A Price and EPS Surprise

Orion Engineered Carbons S.A Price and EPS Surprise
Orion Engineered Carbons S.A Price and EPS Surprise

Orion Engineered Carbons S.A price-eps-surprise | Orion Engineered Carbons S.A Quote

Eastman Chemical Company EMN has an Earnings ESP of +16.17% and a Zacks Rank #2. It is scheduled to report fourth-quarter results on Jan 28.

The Zacks Consensus Estimate for fourth-quarter earnings has been revised 4.8% upward over the last 60 days. The company’s earnings are likely to have benefited from its productivity and cost-cutting actions, growth in high-margin innovation products and a recovery in demand from the coronavirus-induced slowdown.

Eastman Chemical Company Price and EPS Surprise

Eastman Chemical Company Price and EPS Surprise
Eastman Chemical Company Price and EPS Surprise

Eastman Chemical Company price-eps-surprise | Eastman Chemical Company Quote

Dow Inc. DOW has an Earnings ESP of +13.50% and a Zacks Rank #3. It is scheduled to report fourth-quarter results on Jan 28.

The consensus mark for fourth-quarter earnings has been revised 10% upward over the last 60 days. Dow is likely to have gained from cost synergy savings and productivity actions in the fourth quarter. The company is also expected to have benefited from higher demand for its materials across healthcare and packaging markets, and improved demand across furniture & bedding, appliances, packaging, construction and automotive end markets.

Dow Inc. Price and EPS Surprise

Dow Inc. Price and EPS Surprise
Dow Inc. Price and EPS Surprise

Dow Inc. price-eps-surprise | Dow Inc. Quote

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Dow Inc. (DOW) : Free Stock Analysis Report

Eastman Chemical Company (EMN) : Free Stock Analysis Report

LyondellBasell Industries N.V. (LYB) : Free Stock Analysis Report

Orion Engineered Carbons S.A (OEC) : Free Stock Analysis Report

Olin Corporation (OLN) : Free Stock Analysis Report

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