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US Chemical Production Continues to Leap: 5 Stocks to Buy Now

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U.S. chemical production is on an upswing with output rising for the seventh consecutive month in January on gains in almost all chemical producing regions, according to the latest monthly report from the American Chemistry Council (“ACC”).

The Washington, DC-based chemical industry trade group said that the U.S. Chemical Production Regional Index ("CPRI") rose 0.8% in January on a monthly comparison basis, following a 1.4% increase a month ago and a 1.1% rise in November. The U.S. CPRI, which is measured using a three-month moving average, was created to track chemical production in seven regions nationwide.

Per the ACC, recovery continued for the U.S. manufacturing sector for the sixth straight month in January with overall factory activities rising 1% on a three-month moving average basis. Production rose in many key end-use industry segments in the reported month. Biggest gains in output were witnessed in food and beverages, appliances, aerospace, motor vehicles, construction supplies, iron and steel products, fabricated metal products, petroleum refining, oil & gas extraction, plastic products, structural panels, furniture and textile products.

The manufacturing sector serves as a barometer to gauge the overall health of the U.S. economy and has a major influence on the chemical industry. The sector is a major driver for the chemical industry which touches around 96% of manufactured goods. Manufacturing activity is also a key indicator for chemical production and demand.

Production Up in Most Regions

The January reading showed higher production on a monthly comparison basis across nearly all regions. Gulf Coast — the epicenter of the U.S. specialty chemicals and petrochemicals industry — witnessed the biggest gain for the reported month.

Production in the Gulf Coast went up 1.4% in January. Output across Midwest and Southeast rose 0.4% and 0.3%, respectively, in the reported month. Production also ticked up 0.2% in Ohio Valley. Output was flat in Mid-Atlantic while Northeast recorded a 0.1% gain. West Coast saw a 0.1% decline in output.

Chemical production also expanded in many segments in January. These include chlor-alkali, fertilizers, organic chemicals, synthetic rubber, plastic resins, manufactured fibers, synthetic dyes and pigments, and industrial gases. However, declines were witnessed across coatings, adhesives, crop protection, consumer products and other specialty chemicals.

U.S. Chemicals Looking Up From Pandemic Shocks

A strong rebound in demand across major end-use industries such as automotive and construction has put the wind back in the sails of the American chemical industry. The U.S. chemical industry faced the heat from a significant downturn in demand during the first half of 2020 in the wake of the coronavirus pandemic. The pandemic put a brake on industrial and manufacturing activities due to the nationwide rollout of lockdowns and restrictions, leading to a slump in demand for chemicals in key major markets, including automotive, construction and electronics. The chemical industry also faced headwinds from supply chain disruptions as a result of the virus crisis.

However, demand for chemicals started to recover in the third quarter with a rebound in business activities from the coronavirus-induced slowdown as major parts of the United States reopened following the loosening of restrictions.

Notably, the U.S manufacturing sector has rebounded strongly from the coronavirus blues with activities showing a V-shaped recovery on an upturn in the overall economy and strong demand. U.S. manufacturing activities expanded at the fastest pace in three years in February on the heels of a spike in new orders. Meanwhile, the United States has ramped up the national rollout of vaccines. Vaccination of a sufficient number of people will allow the U.S. economy to fully open up, which would augur well for the manufacturing sector.  

Moreover, the U.S. automotive industry has gotten back into gear following the pandemic-driven slump. The automotive sector has witnessed an accelerated recovery on the back of a strong rebound in customer demand for new vehicles, partly supported by low auto loan interest rates. The recovery of the automotive industry that started in the second quarter of 2020 gained momentum in the second half of the year on an uptick in demand. Global automotive production has rebounded from shutdowns due to significant disruptions in supply chains, resulting from coronavirus.

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.

A recovery in construction and automotive markets spruced up demand for chemicals in the December quarter and drove performance of U.S. chemical makers. Improved industrial demand provided support to sales volumes and the top line of U.S. chemical companies in the quarter. As major end-use markets recover, demand for chemicals is expected to go up moving forward.

The ACC, in late 2020, said that the outlook for the U.S. chemical industry for 2021 is positive backed by solid fundamentals. The trade group envisions domestic chemical production volumes (barring pharmaceuticals) to bounce back to a 3.9% growth this year after slipping 3.6% in 2020. Basic chemicals production is also forecast to rebound to a 5% growth in 2021 after declining 1.3% in 2020. Rising demand, stabilizing export markets and the competitive advantage linked to domestic supplies of shale gas and natural gas liquids are among the factors that are expected to contribute to the upswing.

5 Stocks Worth Betting On

A revival in demand across major end-markets represents a tailwind for the U.S. chemical industry. Strengthening industrial and manufacturing activities also bodes 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.

Westlake Chemical Corporation WLK

Texas-based Westlake Chemical sports a Zacks Rank #1. The company should benefit from higher demand in its polyethylene business in specialty applications, especially food packaging, and strength in global demand for polyvinyl chloride resin. It is seeing strong demand in the downstream building products business on the back of new housing starts and spending on repair and remodeling activities. The company will also gain from its investment in capacity expansion projects, synergies of acquisitions, and actions to improve operating efficiency and reduce costs.

Westlake Chemical has expected earnings growth of 138% for the current year. The Zacks Consensus Estimate for the current year for the company has been revised 76.4% upward over the last 60 days. The stock has also gained roughly 36% over the over the past six months.

Dow Inc. DOW

Michigan-based Dow carries a Zacks Rank #2. It is benefiting from cost synergy savings and productivity initiatives and its investment in high-return projects. The company focuses on maintaining cost and operational discipline. Its restructuring program is also expected to deliver margin benefits. Dow also remains committed to invest in attractive areas through highly accretive projects. It is also benefiting from higher demand for its materials across healthcare and packaging markets and a recovery across construction, automotive and appliances end markets.

Dow has expected earnings growth of 111.5% for the current year. The consensus estimate for current-year earnings has been revised 23.2% 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 21%. Its shares have also gained roughly 26% over the past six months.

PPG Industries Inc. PPG

Based in Pennsylvania, PPG carries a Zacks Rank #2. It is executing an aggressive cost-cutting and restructuring strategy, which is expected to support its bottom line. The company is also taking steps to grow business inorganically through strategic acquisitions. Acquisitions including Industria Chimica Reggiana, Alpha Coating Technologies and Ennis-Flint are expected to contribute to the company’s top line this year.

The company has expected earnings growth of 32.3% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 9.6% upward over the last 60 days. The company has also delivered an earnings surprise of 13.3%, on average, over the trailing four quarters. The stock is also up around 12% over the past six months.

Huntsman Corporation HUN

Texas-based Huntsman carries a Zacks Rank #2. It benefits from its investment in downstream businesses and differentiated product innovation. The company remains focused on growing its downstream specialty and formulation businesses and is shifting its methylene diphenyl diisocyanate (MDI) business from components to differentiated systems that typically have higher margins and lower volatility. Substitution of MDI for less effective materials will remain a key driving factor for the MDI business. Huntsman should also gain from significant synergies of Demilec, Icynene-Lapolla and CVC Thermoset Specialties acquisitions.

Huntsman has expected earnings growth of 120.4% for the current year. The consensus estimate for current-year earnings has been revised 13.1% 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 31.6%. Moreover, its shares have gained around 16% over the past six months.

Eastman Chemical Company EMN

Tennessee-based Eastman Chemical has a Zacks Rank #2. It is gaining from its innovation-driven growth model, cost-management actions and improved demand across its end markets from the coronavirus-led downturn. The company is seeing a recovery across building & construction, tires, automotive and consumer durables markets. Eastman Chemical also remains focused on growing new business revenues from innovation. The company’s cost reduction actions are also expected to contribute to its bottom line this year.

Eastman Chemical has expected earnings growth of 28.8% for the current year. Moreover, the Zacks Consensus Estimate for the current year has been revised 9.1% upward over the last 60 days. The company’s shares have also shot up around 41% over the past six months.

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