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Near-Term Prospects Appear Glum for Chemical Plastics Stocks

Anindya Barman

The Zacks Chemicals Plastics industry consists of manufacturers of polymer materials for a host of end-use markets such as packaging, building & construction, transportation, electronics, containers and aerospace. These products include plastic resins such as polyethylene, polypropylene, polyvinyl chloride and polystyrene that are made from raw materials sourced from crude oil and natural gas. Packaging and construction industries remain the mainstays of the chemical plastics industry.

Some of the prominent industry players include PolyOne Corporation (POL), Westlake Chemical Corporation (WLK) and Trinseo S.A. (TSE).

Here are the industry’s three major themes:

  • Chemical plastics makers are roiled by the year-long trade tiff between the United States and China. Washington and Beijing levied billions of dollars in punitive tariffs on each others’ products last year. China’s list of U.S. goods hit with tariffs includes a range of plastic products. Making matters worse, the United States and China recently slapped an additional round of tariffs that will take further toll on the chemical industry. China is one of the biggest export markets for U.S. chemicals and plastics. Beijing’s retaliatory tariffs are hurting U.S. chemical exports and competitiveness of the American chemical industry. The Sino-U.S. trade conflict has led to a slowdown in industrial activities across Asia and Europe, hurting demand for chemicals and plastics.
     
  • Companies in this space face margin pressure from higher raw materials costs as a result of short supply. The stricter environmental policy in China has led to tightening in the supply of certain key raw materials as a result of plant closures. The disruption in the supply chain has pushed up prices of inputs. Some of the players are also exposed to challenges from elevated logistics costs. Nevertheless, strategic measures - including cost-cutting and productivity improvement, and actions to raise selling prices - should help these companies counter the headwinds from cost inflation.
     
  • The U.S. chemical plastic industry is reaping the benefits of abundant and cheap ethane feedstock extracted from shale gas. The shale bounty has provided U.S. plastic producers a compelling cost advantage over their global counterparts, which use oil-based feedstock such as naptha. This is driving investment in plastic production projects in the U.S. Gulf Coast to beef up capacity. The shale boom has incentivized a number of companies to plough billions of dollars for setting up crackers in the United States to make key feedstocks like ethylene and propylene in a cost-effective way. Such investments should boost capacity.


Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Chemicals Plastics industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #252, which places it at the bottom 1% of 254 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. 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.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for the current year has gone down 59.2%.

Before we present a few chemical plastics stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Lags Sector and S&P 500

The Zacks Chemicals Plastics industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials Sector over the past year.

The industry has declined 28.5% over this period compared with the S&P 500’s rise of 0.3% and the broader sector’s fall of 16.9%.

One-Year Price Performance

 

 

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing chemical stocks, the industry is currently trading at 5.79X, below the S&P 500’s 11.05X and the sector’s 8.74X.

Over the past five years, the industry has traded as high as 10.67X, as low as 3.90X, with a median of 5.79X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 



 

Bottom Line

Trade tensions between the United States and China pose as headwinds to the industry. Moreover, margins of companies in this space will remain under pressure in an inflationary environment given the raw material cost inflation.

Nevertheless, strategic actions such as continued focus on cost and productivity, and expansion of scale through acquisitions should help them alleviate any pressure on margins. U.S. plastic makers should also continue to enjoy the advantage of access to abundant and affordable shale gas feedstock.

Currently, none of the stocks in the Zacks Chemicals Plastics industry carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). We are presenting one stock with a Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Westlake Chemical Corporation: The Zacks Consensus Estimate for earnings for the current year for this Texas-based company has remained stable over the last 30 days. It also has an estimated long-term earnings growth rate of 6.5%.

Price and Consensus: WLK

 



 

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Westlake Chemical Corporation (WLK) : Free Stock Analysis Report
 
Trinseo S.A. (TSE) : Free Stock Analysis Report
 
PolyOne Corporation (POL) : Free Stock Analysis Report
 
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