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US Chemical Production on an Upswing: 5 Stocks to Snap Up Now

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Anindya Barman
·8 min read
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U.S. chemical production continues to leap with output rising for the fourth consecutive month in October on gains across 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 0.9% in October on a monthly comparison basis, following a 0.8% increase a month ago and a 1% rise in August. 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 in October with overall factory activities rising 0.8% on a three-month moving average basis. Production rose in nearly all major end-use industry segments in the reported month. Biggest gains in output were witnessed in iron and steel, aerospace, foundries, tires, machinery and apparel.

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.

Meanwhile, overall chemical production fell 4.9% on a year-over-year comparison basis in October, the ACC noted. This marked the 17th straight month of year-over-year declines. However, it reflects an improvement over the past several months.

Production Rises in All Regions

The October reading showed higher production on a monthly comparison basis across all regions. Northeast witnessed the biggest gain for the reported month.

Production in the Gulf Coast — the epicenter of the U.S. specialty chemicals and petrochemicals industry — went up 1.1% in October. Output across Midwest and Southeast rose 0.9% in the reported month. Production also rose 0.7% in Ohio Valley. West Coast and Mid-Atlantic recorded a 0.8% increase in output. Northeast racked up a 1.1% gain.

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

U.S. Chemicals Recuperate From Pandemic Shocks

The U.S. chemical industry faced the heat from a significant downturn in demand during the first half in the wake of the coronavirus pandemic. The pandemic brought industrial activities to a grinding halt due to the unprecedented rollout of lockdowns and restrictions, leading to a slump in demand for chemicals in key major markets, including automotive, construction and electronics. The industry also faced headwinds from supply chain disruptions as a result of the pandemic.

However, demand 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 on a recovery in the overall economy.

The U.S. manufacturing sector kept the momentum going in October with activities growing at the fastest pace in nearly two years. According to the Institute for Supply Management, the U.S. Manufacturing Purchasing Managers’ Index clocked 59.3% in October, up from 55.4% in September. The October figure indicates an expansion in the overall economy for the sixth straight month following a contraction in April. New orders also grew for the fifth month in a row in October.

Moreover, the U.S. automotive industry has gotten back into gear following the pandemic-driven slump riding on a revival in consumer demand for new vehicles, especially trucks and sport utility vehicles, partly supported by low auto loan interest rates. The recovery of the domestic automotive industry gained momentum in the third quarter. Pent-up demand, cheap borrowing costs, rising consumer confidence and the shift toward private transportation amid the pandemic are driving new car sales. The resumption of many projects, which were stalled earlier due to pandemic-induced labor shortages and supply chain disruptions, also supported the rebound in the construction sector.

A recovery in construction and automotive markets spurred up demand for chemicals in the September quarter. 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 through the balance of 2020.

Meanwhile, chemical makers are benefiting from higher demand for chemicals and materials across industries like healthcare and packaging. With a surge in the number of coronavirus cases around the world, demand for health, hygiene and safety products (including PPEs, sanitizers, disinfectants and cleaning products) has skyrocketed. A number of chemical companies are ramping up production to address the surging demand for these products in these testing times.

5 Stocks Worth Betting On

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

Dow Inc. DOW

Michigan-based Dow sports a Zacks Rank #1. 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 through cost synergy as well as stranded cost-removal initiatives. It also remains committed to invest in attractive areas through highly accretive projects. Dow is also benefiting from higher demand for its materials across healthcare and packaging markets.

The Zacks Consensus Estimate for current-year earnings for Dow has been revised 49% 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%. Its shares have also shot up roughly 49% over the past six months.

Koppers Holdings Inc. KOP

This Pennsylvania-based company has a Zacks Rank #2. Koppers is witnessing strong demand for residential wood treatment preservatives in most geographic regions. It remains focused on capturing growth opportunities in wood preservation. It also remains committed to delivering strong cash flows and reducing debt.

Koppers has expected earnings growth of 16% for the current year. The company has also delivered an earnings surprise of 25.3%, on average, over the trailing four quarters. Moreover, the consensus estimate for current-year earnings has been revised 12% upward over the last 60 days. The company has also seen its shares rally 69% over the past six months.

PPG Industries Inc. PPG

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

The consensus estimate for current-year earnings for PPG has been revised 13.4% upward over the last 60 days. The company has also delivered an earnings surprise of 12.3%, on average, over the trailing four quarters. The stock is also up around 48% over the past six months.

Valvoline Inc. VVV

Kentucky-based Valvoline has a Zacks Rank #2. Improving miles driven trends, following the easing of pandemic-related restrictions are expected to drive its top line. The company should also benefit from its cost-reduction program, strategic acquisitions and investments in the expansion of its Quick Lubes network.

Valvoline has expected earnings growth of 10.8% for the current fiscal year. It has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 20.8%. Moreover, the Zacks Consensus Estimate for the current year has been revised 7.2% upward over the last 60 days. The company’s shares are also up around 24% over the past six months.

Quaker Chemical Corporation KWR

Pennsylvania-based Quaker Chemical carries a Zacks Rank #2. The company's combination with Houghton International, Inc. and the acquisition of the operating divisions of Norman Hay plc are expected to drive its top line. It is also expected to benefit from cost-saving actions, integration synergies, improvement in product margins, and healthy cash flows.

The consensus estimate for current-year earnings has been revised 23.6% 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 50.3%. Moreover, its shares have rallied around 47% over the past six months.

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