5 Chemical Stocks Likely to Outshine Q4 Earnings Estimates
Chemical companies’ fourth-quarter results are expected to reflect higher demand across major end-use industries and benefits of strategic actions to mitigate significant headwinds from supply-chain and logistical upheavals. The chemical industry witnessed a strong rebound last year from the havoc wreaked by the coronavirus, thanks to an upturn in demand across major end markets such as automotive, construction, healthcare and electronics. The industry bore the brunt of demand shocks for much of the first half of 2020 as global industrial activities were halted amid the pandemic.
However, with the easing of restrictions on business activities globally, demand for chemicals started to pick up from the third quarter of 2020. The recovery is being driven by an upswing in global manufacturing and industrial activities.
The companies in this space that have reported fourth-quarter results so far have delivered strong performance on the back of a rebound in end-market demand notwithstanding a few headwinds including higher raw material and logistics costs. A number of chemical companies are yet to report their quarterly numbers including Huntsman Corporation HUN, The Chemours Company CC, Westlake Chemical Corporation WLK, ICL Group Ltd ICL and Green Plains Inc. GPRE.
How Have Things Shaped Up for These Companies?
Chemical companies are likely to have benefited from strong demand and higher prices in the fourth quarter. Demand for both commodity and specialty chemicals has been healthy in key end-use markets.
Chemical makers have been seeing higher demand from the automotive market notwithstanding the chip shortage, which continues to affect automotive builds globally. The automotive industry has witnessed a recovery after last year’s virus-led slump on the back of strong pent-up demand.
Strength is also being witnessed in residential construction globally, supported by lower interest rates and higher demand for new properties due to the rising work-from-home trend. Companies in the chemical space have also been benefiting from higher demand across healthcare and packaging markets, thanks to coronavirus. These companies also witnessed a recovery in demand across the aerospace and energy markets. Strong demand is likely to have driven their volumes and top lines in the fourth quarter.
However, chemical companies are expected to have faced margin pressure in the fourth quarter, resulting from raw material cost inflation as well as supply-chain and freight transportation disruptions. Supply chain disruptions resulting from the closure of a large swath of factories due to coronavirus and weather-related events have led to a spike in raw material costs. Supply tightness continues for a number of key raw materials. The industry has also faced headwinds from higher costs associated with logistics constraints and port delays. The shipping bottlenecks have led to a surge in freight costs.
The supply crunch was worsened by Hurricane Ida. Force majeures and plant shutdowns associated with Ida further squeezed the supply of major raw materials including ethylene and propylene and pushed up their prices. The lingering impacts of supply-chain and logistics snarls are expected to be reflected in the December-quarter results.
Against this backdrop, chemical makers remain were focused on self-help 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 the cost inflation and tightness in the supply chain. Chemical companies have been actively focused on acquisitions to diversify and drive growth. The benefits of these actions might reflect on their fourth-quarter results.
Expectations for Q4
The chemical industry is housed within the broader Zacks Basic Materials sector. Basic Materials is among the sectors that are expected to deliver the strongest earnings growth in the fourth quarter. Overall earnings for the sector are projected to rise 79.6% on 29.9% higher revenues, per the latest Earnings Trends report. The projected growth, however, reflects a slowdown from a 136.1% rise in earnings on a 38.7% increase in revenues that was 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 a positive 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 an earnings surprise this time around:
Huntsman has an Earnings ESP of +0.09% and carries a Zacks Rank #2. The company is scheduled to report fourth-quarter results on Feb 15.
Huntsman surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 12.8%. The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 88 cents, indicating a rise of 72.6% from the prior-year quarter. HUN is likely to have benefited from strong demand across its businesses on the back of economic recovery. It is expected to have witnessed favorable trends in its construction markets in the quarter to be reported. Benefits of higher selling prices, synergies arising from its recent acquisitions, and cost-saving initiatives are also expected to reflect on its performance.
Huntsman Corporation Price and EPS Surprise
Huntsman Corporation price-eps-surprise | Huntsman Corporation Quote
Chemours has an Earnings ESP of +10.35% and carries a Zacks Rank #3. The company is scheduled to report fourth-quarter results on Feb 10. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chemours surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 34.2%. The consensus estimate for fourth-quarter earnings is pegged at 87 cents, which suggests a rise of 42.6% from the prior-year quarter. CC is likely to have benefited from a rebound in demand from the coronavirus-induced downturn, strong execution and its cost-reduction and pricing actions. It is expected to have witnessed continued strong demand for the Opteon platform in mobile and stationary applications in the fourth quarter. Productivity and operational improvement actions across its businesses are also likely to have supported margins.
The Chemours Company Price and EPS Surprise
The Chemours Company price-eps-surprise | The Chemours Company Quote
Westlake Chemical has an Earnings ESP of +0.69% and a Zacks Rank #3. It is slated to report fourth-quarter results on Feb 22.
Westlake Chemical surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 17.8%. The consensus estimate for fourth-quarter earnings is pegged at $4.62, which suggests a rise of 431% from the prior-year quarter. WLK is likely to have benefited from higher demand in its polyethylene business in specialty applications, especially consumer product packaging, and strength in global demand for polyvinyl chloride resin. Demand in the downstream building products business is expected to have remained strong in the quarter on the back of continued housing growth and spending on repair and remodeling activities. Higher prices driven by strong demand and actions to improve operating efficiency and reduce costs are also likely to have aided its performance.
Westlake Chemical Corporation Price and EPS Surprise
Westlake Chemical Corporation price-eps-surprise | Westlake Chemical Corporation Quote
ICL Group has an Earnings ESP of +8.00% and a Zacks Rank #3. It is slated to report fourth-quarter results on Feb 9.
ICL Group surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 59.6%. The Zacks Consensus Estimate for fourth-quarter earnings stands at 17 cents, which indicates a rise of 240% from the prior-year quarter. The company is likely to have benefited from the strength in its specialties businesses and an upside in commodity prices. ICL is seeing higher demand across consumer electronics, textiles, automotive and construction markets. Higher end-market demand and prices are expected to have driven its performance. A recovery in end markets is likely to have aided the sales of its bromine compounds and phosphorous and magnesia-based products. Solid demand for electric vehicles and energy storage is also expected to have driven demand for its phosphate and bromine-based specialty products.
ICL Group Ltd Price and EPS Surprise
ICL Group Ltd price-eps-surprise | ICL Group Ltd Quote
Green Plains has an Earnings ESP of +64.06% and a Zacks Rank #3. It is scheduled to report fourth-quarter results on Feb 11.
Green Plains missed the Zacks Consensus Estimate in three of the trailing four quarters while beating the same once. It has a trailing four-quarter negative earnings surprise of around 131.1%, on average. The consensus estimate for fourth-quarter earnings is pegged at 19 cents, which suggests an increase of 135.9% from the prior-year quarter. Strong sales in the company’s ethanol production business are likely to have driven its top line in the fourth quarter. GPRE is also likely to have benefited from higher prices for ethanol, distillers grains and corn oil. Its fourth-quarter performance is also expected to have been aided by improved ethanol margin.
Green Plains, Inc. Price and EPS Surprise
Green Plains, Inc. price-eps-surprise | Green Plains, Inc. Quote
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