5 Specialty Chemical Stocks to Scoop Up on Demand Revival
The specialty chemical industry faced the heat from demand shocks for much of the first half 2020 as a result of sluggish global industrial activities amid the coronavirus pandemic. Shutdowns and travel restrictions to blunt the spread of infection paralyzed industrial and economic activities, squeezing demand for specialty chemicals across major end-use markets.
Nevertheless, the specialty chemical industry has bounced back from the virus-led slowdown on a pick-up in demand in key markets, a strong economic rebound in China (a top consumer) and the reopening of the major economies around the world. Demand for specialty chemicals started to pick up in the third quarter of 2020 with a rebound in global economic activities.
Notably, specialty chemicals that include catalysts, surfactants, specialty polymers and coating additives have application in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics. Automotive, construction, textile, food & beverages, electronics, energy and agriculture are among the major markets for these chemicals.
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 in the third quarter on an uptick in demand. Notably, U.S. auto sales started to rebound in the second half after hitting a coronavirus-induced low in April 2020. Low auto loan interest rates and increasing preference for private transportation due to health, safety and social distancing concerns have contributed to a pick-up in U.S. auto sales. Major U.S. automakers are ramping up production to boost weak vehicle inventories at dealerships amid surging demand.
The National Automobile Dealers Association (“NADA”) expects U.S. new-vehicle sales to rise 7.2% year over year to 15.5 million units in 2021 factoring in low interest rates, a gradual return of fleet demand for new vehicles, consumer preferences for personal vehicle ownership over rideshare services and potential economic boom in the second half once vaccination is widely available and Americans are able to get back to work.
The construction sector has also recovered on the restart 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. Notably, the U.S. housing sector has staged a solid recovery, backed by record-low borrowing costs and higher demand for new properties due to the rising trend of working from home amid the pandemic. The Federal Reserve’s dovish monetary stance and lower mortgage rates are expected to drive U.S. housing.
As these major markets recover, demand for specialty chemicals is expected to go up moving ahead. Strength in the construction market and higher automotive production are expected to spruce up demand for paints and coatings.
Meanwhile, the U.S manufacturing sector is gaining strength on a recovery in the overall economy. The sector kept the momentum going in December despite a surge in coronavirus cases. According to the Institute for Supply Management, the U.S. Manufacturing Purchasing Managers’ Index clocked 60.7% in December, up from 57.5% in November, reflecting sustained rebuilding of economic activities. The December figure indicated an expansion in the overall economy for the eighth straight month following a contraction in March, April and May. New orders also grew for the seventh month in a row in December.
Manufacturing activity is a key indicator for chemical demand. Thus, the rebound in manufacturing activity augurs well for the U.S. specialty chemical industry.
Specialty chemical makers also remain focused on self-help measures, including cost-cutting and productivity improvement, expansion into high-growth markets, operational efficiency improvement, restructuring and actions to strengthen balance sheet and boost cash flows. These actions are expected to help these companies to navigate through the current challenging environment.
Favorable Industry Rank
The Zacks Chemicals Specialty industry currently carries a Zacks Industry Rank #106, which places it at the top 42% of more than 250 Zacks industries. 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.
5 Stocks Worth Betting On
A revival in demand across major end-markets represents a tailwind for the specialty chemical industry. The rebound in industrial and manufacturing activities bode well for the industry. As such, it would be prudent to zero in on stocks in the space that have compelling prospects.
We highlight the following five stocks, with a solid Zacks rank, that are good options for investment right now. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Daqo New Energy Corp. DQ
The China-based company, sporting a Zacks Rank #1, is a leading producer of high-purity polysilicon. It is benefiting from higher production volumes. The company is also likely to gain from its actions to improve its cost structure. It remains committed to lower production costs. Its energy efficiency efforts and enhanced manufacturing efficiencies are contributing to lower costs.
The company has expected earnings growth of 71.7% for 2021. The Zacks Consensus Estimate for the current year has been revised 10.1% upward over the last 60 days. The company surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 179.1%. The stock has also popped roughly 93% over the past three months.
Element Solutions Inc ESI
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, currently carrying a Zacks Rank #2, is expected to gain from healthy demand in its high-end electronics business and the strong 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 lend support to its margins.
The company has expected earnings growth of 16.7% for 2021. The consensus estimate for earnings for 2021 has also been revised 7.7% 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 18.4%. Its shares have also surged roughly 53% over the past three months.
Celanese Corporation CE
Texas-based Celanese has a Zacks Rank #2. It is expected to benefit from its productivity measures, investments in high-return organic projects and strategic acquisitions. The company is also seeing a recovery in demand across most of its end markets. Moreover, Celanese continues to actively pursue acquisitions, which are providing it opportunities for additional growth, investment and synergies.
The company has expected earnings growth of 30.2% for 2021. The consensus estimate for current-year earnings has been revised 2.4% 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 8.6%. Moreover, its shares have gained around 15% over the past three months.
Flexible Solutions International Inc. FSI
Canada-based Flexible Solutions, carrying a Zacks Rank #2, develops and manufactures products that increase crop yield, improve oil and gas operations, reduce the environmental footprint in cleaning and water treatment, and save water and energy. Its subsidiary, NanoChem, remains the main source of revenues and cash flows. New opportunities in applications such as detergent, water treatment, oil field extraction and agriculture are expected to drive sales in NanoChem. The company’s Biodegradable Polymers and Chemical Additives unit is also benefiting from growth across most product lines. The company also has adequate cash resources to meet its cash flow requirements and future commitments.
The company has expected earnings growth of 17.2% for 2021. The Zacks Consensus Estimate for earnings for 2021 has also been revised 6.3% upward over the last 60 days. The stock has also surged 63% over the past three months.
Ferro Corporation FOE
Based in Ohio, Ferro is a leading supplier of technology-based functional coatings and color solutions. The company, carrying a Zacks Rank #2, is seeing a recovery in demand for its products and is expected to benefit from higher demand for its high-margin products. It is witnessing higher demand in residential construction and appliance markets. It should also gain from its expense control actions and optimization programs that are driving efficiency.
Ferro has expected earnings growth of 36.2% for 2021. The consensus estimate for the current year has been revised 1% 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 26.9%. Its shares are also up around 20% over the past three months.
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Element Solutions Inc (ESI) : Free Stock Analysis Report
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