Chemical companies’ third-quarter results are expected to reflect the upturn in demand across major end-use markets from the coronavirus-induced slowdown. The chemical industry faced the heat from a significant downturn in demand during the first half in the wake of the pandemic.
The contagion brought global industrial activities to a grinding halt due to the unprecedented rollout of lockdowns and restrictions by governments around the world, leading to a slump in demand for chemicals in key major markets, including automotive, construction and electronics. In particular, disruptions due to coronavirus hurt industrial activities in China, a top consumer of chemicals.
The industry also faced headwinds from the short supply of raw materials as a result of the pandemic. The closure of a large number of factories across China to arrest the spread of the virus disrupted the global supply chain and impaired logistics.
However, demand started to recover in the third quarter with the return of global economic activities following the loosening of restrictions. The uptick in demand is driven by recovering manufacturing and industrial activities globally and the economic rebound in China.
Economic activities in China have picked up as the country is gradually pulling out of its coronavirus-led slumber, aided by government stimulus measures. China’s industrial sector is slowly returning to the pre-pandemic levels, supported by a rebound in domestic demand and Beijing’s infrastructure push.
Global manufacturing recovery is also gaining momentum as reflected by the recent upbeat manufacturing data from the United States, Eurozone and China. The U.S. manufacturing sector is gaining strength on a return of demand and a recovery in the overall economy. China's manufacturing activities have also picked up on demand recovery and government’s efforts to shrug off the impacts of the pandemic. Notably, manufacturing activity is a key indicator for chemical demand.
Meanwhile, the automotive industry has gotten back into gear following the pandemic-driven slump riding on a revival in consumer demand. Pent-up demand and the shift toward private transportation amid the pandemic are driving new car sales globally. The resumption of many projects, which were stalled earlier due to pandemic-induced labor shortages and supply chain disruptions, also supported the rebound in the construction sector.
A recovery in construction and automotive markets is likely to have spurred up demand for chemicals in the September quarter. Improved industrial demand is likely to have provided support to sales volumes and the top line of chemical companies in the third quarter.
Against this challenging backdrop, chemical makers remain focused on strategic 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. 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 third-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 Q3
The chemical industry is housed within the broader Zacks Basic Materials sector. The third-quarter earnings picture for the Basic Materials sector looks lackluster. Overall earnings for the sector are projected to fall 22.6% on 10.6% lower revenues, per the latest Earnings Preview. However, the projections reflect an improvement from a 48.8% decline in earnings on a 20.3% drop in revenues witnessed in the second 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 a positive earnings surprise is as much as 70%.
Below we list five chemical stocks that have the right combination of elements to pull off earnings surprises this earnings season:
Axalta Coating Systems Ltd. AXTA has an Earnings ESP of +4.39% and sports a Zacks Rank #1. The company is scheduled to report third-quarter results on Oct 22. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for third-quarter earnings has been revised 3.1% upward over the last 60 days. The company is likely to have benefited from its cost-reduction actions in response to the pandemic, improving global traffic volumes and a recovery in global automotive production.
Axalta Coating Systems Ltd. Price and EPS Surprise
Axalta Coating Systems Ltd. price-eps-surprise | Axalta Coating Systems Ltd. Quote
Rayonier Advanced Materials Inc RYAM has an Earnings ESP of +14.29% and carries a Zacks Rank #2. It is slated to report third-quarter results on Nov 3.
The consensus mark for third-quarter earnings has been revised 30% upward over the last 60 days. The benefits of the company’s cost-reduction and working capital management initiatives are expected to get reflected on its results. Recovery across automotive, industrial and construction end-markets are also expected to have provided support to its High Purity Cellulose business. Moreover, a rebound in housing activities, strength in the repair & remodel market, and higher lumber prices are likely to have aided its forest products business.
Rayonier Advanced Materials Inc. Price and EPS Surprise
Rayonier Advanced Materials Inc. price-eps-surprise | Rayonier Advanced Materials Inc. Quote
Dow Inc. DOW has an Earnings ESP of +11.81% and a Zacks Rank #3. It is scheduled to report third-quarter results on Oct 22.
The consensus mark for third-quarter earnings has been revised 182% upward over the last 60 days. Dow is expected to have benefited from cost synergy realizations. The company is also likely to have gained from higher demand for its materials across healthcare and packaging markets, and demand recovery across automotive, construction and electronics.
Dow Inc. Price and EPS Surprise
Dow Inc. price-eps-surprise | Dow Inc. Quote
DuPont de Nemours, Inc. DD has an Earnings ESP of +0.61% and a Zacks Rank #3. It is slated to report third-quarter results on Oct 29.
The Zacks Consensus Estimate for third-quarter earnings has been revised 2.7% upward over the last 60 days. Benefits of cost synergy savings and the company’s productivity actions are expected to get reflected on its results. A recovery in automotive and residential construction, and higher demand for products used in personal protection, food & beverage, water filtration and probiotics are also like to have aided its performance.
DuPont de Nemours, Inc. Price and EPS Surprise
DuPont de Nemours, Inc. price-eps-surprise | DuPont de Nemours, Inc. Quote
Eastman Chemical Company EMN has an Earnings ESP of +3.39% and a Zacks Rank #3. It is scheduled to report third-quarter results on Oct 29.
The Zacks Consensus Estimate for third-quarter earnings has been revised 8.6% upward over the last 60 days. The company’s earnings are likely to have benefited from its productivity and cost-cutting actions, and growth in its high-margin innovation products.
Eastman Chemical Company Price and EPS Surprise
Eastman Chemical Company price-eps-surprise | Eastman Chemical Company Quote
5 Stocks Set to Double
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