Specialty chemicals that include catalysts, surfactants, speciality polymers, coating additives and oilfield chemicals are used in specific fields based on their performance. They have application in the manufacturing process of a vast range of products including paints and coatings, cosmetics, petroleum products, inks and plastics.
Industry Set to Run Higher in 2019
The specialty chemical industry is poised for an upside in 2019 on healthy demand in end-use markets such as construction, electronics, automotive and agriculture. In particular, the U.S. specialty chemical industry is set to ride the growth wave this year on the back of higher industrial activities and rising end-market demand.
The American Chemistry Council ("ACC"), a leading industry trade group, envisions growth in construction markets along with gains in manufacturing and exports to drive the specialty chemicals segments.
According to the ACC, the specialty chemicals segment is expected to see production growth of 2.2% in 2019. Improvement in oilfield chemicals, electronic chemicals, coatings, adhesives, cosmetic chemicals, and flavors and fragrances are fueling growth in specialty chemicals. The trade group expects demand for specialty chemicals to grow in sync with gains in industrial and construction sectors in the years ahead.
The ACC expects improving export markets to contribute to growth of the domestic chemical industry. Strength in export markets and higher business investment have boosted demand in major chemical end-use markets such as light vehicles and housing, per the trade group. While the automotive sector remains at high levels, housing activity is improving with 1.27 million starts in 2018 and 1.34 million in 2019. Light vehicle sales are also expected to remain elevated at 16.8 million in 2019.
Strategic Actions to Reap Margin Benefits
Companies in the specialty chemical space face headwinds from a spike in costs of raw materials as a result of short supply partly due to production outages and plant shutdowns. China’s environmental crackdown has led to the tightening in the supply of certain key raw materials as a result of plant closures. The disruption in the supply chain has pushed up the prices of inputs.
However, the companies in this space are gaining from strategic measures including cost-cutting and productivity improvement, expansion into high-growth markets, operational efficiency improvement and earnings-accretive acquisitions. Moreover, a number of companies are taking aggressive price increase actions in the wake of raw material cost inflation. These actions should help them alleviate any pressure on margin.
Trade Tariffs — A Dampener
Trade tensions between the United States and China continue to cloud the prospects of the chemical industry. The Trump administration slapped punitive tariffs on $250 billion worth of Chinese products last year while China has imposed retaliatory tariffs on $110 billion in U.S. goods. China’s tariffs on American products include a wide range of petrochemicals, specialty chemicals and plastics.
The United States and China reached a temporary ceasefire on tariffs at the G20 Summit in Buenos Aires in December 2018. Under the truce, the countries agreed not to levy further tariffs for 90 days. The Trump administration agreed to hold off on plans to raise tariffs (to 25% from existing 10%) on $200 billion in Chinese goods. However, the existing tariffs remain in place.
Washington and Beijing now have until Mar 1, 2019 to hammer out a deal before additional tariffs are implemented. While recent talks between the countries have raised hopes of a resolution of the trade dispute, the tariffs currently in place are already doing damage to the chemical industry.
China is one of the biggest export markets for U.S. chemicals. Beijing’s retaliatory trade actions have created an uncertain demand environment for U.S. chemical products in this major market. Chemical industry trade groups are worried that the tariffs would hurt U.S. chemical exports and the competitiveness of the American chemical industry. China’s retaliatory tariffs have hit more than 1,000 U.S. chemicals and plastics exports worth an estimated $10.8 billion, per the ACC.
5 Specialty Chemical Stocks to Buy
Notwithstanding a few challenges including input cost pressure and concerns over trade tariffs, the specialty chemical industry is poised for an upswing this year on growing end-market demand, growth in industrial and construction sectors and gains in exports.
The Zacks Chemicals Specialty industry currently carries a Zacks Industry Rank #107, which places it in the top 42% of more than 250 Zacks industries. Our back testing shows that the top 50% of the Zacks ranked industries outperforms the bottom half by a factor of more than two to one.
As such, it would be prudent to invest in specialty chemical stocks that have compelling growth prospects. We highlight the following five stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ferro Corporation FOE
Ohio-based Ferro sports a Zacks Rank #1 and has an expected earnings growth of 21.6% for 2019. Earnings estimates for the current year have been revised 4.4% upward over the last 60 days. Moreover, the company delivered positive earnings surprise in three of the trailing four quarters, with an average positive surprise of 0.3%. The company also has an expected long-term earnings per share growth rate of 15.6%.
Ingevity Corporation NGVT
Our next pick in the space is South Carolina-based Ingevity sporting a Zacks Rank #1. It has expected earnings growth of 21.5% for 2019. The company also has an expected long-term earnings per share growth rate of 12%. Moreover, Ingevity delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 19.8%.
Westlake Chemical Partners LP WLKP
Based in Texas, Westlake Chemical Partners carries a Zacks Rank #2. The company has expected earnings growth of 14.2% for 2019. Earnings estimates for the current year have been revised 5.1% upward over the last 60 days. The stock also has an expected long-term earnings per share growth rate of 2.8%
Quaker Chemical Corporation KWR
Pennsylvania-based Quaker Chemical is another attractive choice armed with a Zacks Rank #2. It has an expected earnings growth of 21.1% for 2019. Earnings estimates for the current year have been revised 2.7% upward over the last 60 days. The company delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of roughly 5%. The stock also has an expected long-term earnings per share growth rate of 11%
Livent Corporation LTHM
Pennsylvania-based Livent caries a Zacks Rank #2. The company has an expected earnings growth of 20.5% for 2019. Earnings estimates for the current year have been revised 2.8% upward over the last 60 days. Moreover, the company delivered positive earnings surprise of 19.1% in the last reported quarter.
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