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4 Diversified Chemical Stocks to Watch Amid Industry Woes
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The Zacks Chemicals Diversified industry is grappling with raw material cost inflation as well as higher supply-chain, energy and logistics costs, made worse by the Russia-Ukraine conflict. Semiconductor shortage, which is hurting the automotive sector, and pandemic-related restrictions in China may also impact demand for chemicals.
Industry players like Air Products and Chemicals, Inc. (APD - Free Report) , Albemarle Corporation (ALB - Free Report) , Univar Solutions Inc. and Innospec Inc. (IOSP - Free Report) are banking on strategic measures, including operating cost reductions and aggressive price hikes to tide over the challenging environment.
About the Industry
The Zacks Chemicals Diversified industry consists of manufacturers of basic chemicals, plastics, specialty chemicals and agricultural chemicals. Companies in this space serve a host of end markets, such as automotive, building & construction, transportation, electronics, aerospace and agriculture. Basic chemicals are produced in large quantities, and include petrochemicals and intermediates (such as ethylene, propylene and benzene), polymers (including plastic resins such as polyethylene, polypropylene and polyvinyl chloride), and inorganic chemicals (such as chlorine, caustic soda and titanium dioxide). Specialty chemicals that include catalysts, specialty polymers and coating additives are used in specific fields based on their performance. Agricultural chemicals include herbicides, fungicides and insecticides that are used to protect crops from disease, pests and weeds.
What's Shaping the Future of the Chemicals Diversified Industry?
Higher Input Costs Pose Margin Headwinds: The industry players are exposed to cost pressure associated with raw materials resulting from short supply. These companies also face challenges arising from higher supply-chain and logistics costs. The disruption in the supply chain has pushed up the prices of inputs. Russia's invasion of Ukraine and new government-mandated lockdowns in China have also put more pressure on the already strained global supply chain. These companies are also facing headwinds from higher energy costs, especially in Europe, which has witnessed a significant spike in costs amid the ongoing war in Ukraine. The lingering impacts of these bottlenecks are expected to continue over the short term. Higher raw material, energy and logistics costs are, thus, likely to hurt the margins of diversified chemical companies.
Demand Worries From Chip Crunch, China Slowdown: Companies in the chemical-diversified space face headwinds from the slowdown in the global automotive industry. The semiconductor shortage has led to reduced automotive builds around the world, causing a slowdown in chemical demand in this major market. The Russia-Ukraine conflict has triggered a fresh round of global microchip shortage. Both these countries are major suppliers of raw materials required for global semiconductor production. The chip crisis is unlikely to abate anytime soon, given the impact of the war. The slowdown in automotive production may create a short-term demand headwind. The slowdown in economic activities in China due to the restrictions following a resurgence in COVID-19 infections is also impacting chemical demand. The restrictions in China have resulted in a higher level of near-term economic uncertainty, which may continue to affect chemical volumes.
Strategic Actions to Aid Results: The companies in this space are taking a host of strategic measures, including cost-cutting and productivity improvement, operational efficiency improvement and actions to strengthen the balance sheet and boost cash flows. In particular, the industry participants are aggressively implementing actions to bring down costs. These include the reduction of discretionary spending and traveling expenses. The industry players are also raising selling prices to counter raw material and logistics cost inflation. These moves are likely to help the industry in sustaining margins amid the prevailing challenges.
Zacks Industry Rank Indicates Downbeat Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #186, which places it at the bottom 25% of more than 250 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.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms S&P 500
The Zacks Chemicals Diversified industry has outperformed the Zacks S&P 500 composite while modestly underperforming the broader Zacks Basic Materials sector over the past year.
The industry has lost 0.7% over this period compared with the S&P 500’s decline of 16.3% and the broader sector’s decline of 0.1%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the 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 7.84X, below the S&P 500’s 12.18X and above the sector’s 7.27X.
Over the past five years, the industry has traded as high as 13.44X, as low as 5.38X and at the median of 8.03X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 Chemicals Diversified Stocks to Keep a Close Eye on
Innospec: Colorado-based Innospec makes and markets a wide range of specialty chemicals to markets in the Americas, Europe, the Middle East, Africa and Asia-Pacific. It is witnessing a recovery across all its businesses from the pandemic-led slowdown. Strength in the personal care segment is driving sales in the company’s Performance Chemicals division.
IOSP’s investment in capacity expansion will also offer incremental growth opportunities in this business. Its Fuel Specialties unit is benefiting from the expansion of technologies in areas such as renewable diesel, low-sulfur marine fuel and gasoline direct injection engines.
Innospec carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 30.4% for the current year. The Zacks Consensus Estimate for IOSP's current-year earnings has been revised 5.7% upward over the last 60 days. The company beat the Zacks Consensus Estimate for earnings in each of the last four quarters at an average of roughly 25.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: IOSP
Air Products: Based in Pennsylvania, Air Products is a leading industrial gases company. It is benefiting from investments in high-return projects, new business deals, acquisitions and productivity initiatives. It remains committed to its gasification strategy and is executing its growth projects. These projects are expected to be accretive to earnings and cash flows.
Air Products is also boosting productivity to improve its cost structure. APD is seeing the positive impacts of its productivity actions. Benefits from additional productivity and cost improvement programs are likely to support its margins. Air Products also has been benefiting from higher pricing. Higher merchant demand is also driving its volumes.
Air Products, a Zacks Rank #3 (Hold) stock, has expected earnings growth of 9.3% for the current fiscal year. APD beat the Zacks Consensus Estimate in each of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 1.7%.
Price and Consensus: APD
Albemarle: North Carolina-based Albemarle is a premier specialty chemicals company with leading positions in attractive end markets globally. It is benefiting from higher volumes in its lithium business on continued recovery in global economic activities. Healthy customer orders and plant productivity improvements are supporting volumes. Higher lithium prices due to tight market conditions are also supporting its performance. Its bromine business is also gaining from higher demand, a rebound in certain end markets, higher pricing and cost-saving actions.
ALB is seeing strong demand for flame retardants. The company is also strategically executing its projects aimed at boosting its global lithium derivative capacity. It remains focused on investing in high-return projects to drive productivity. Albemarle is also benefiting from cost-saving and productivity initiatives.
Albemarle, currently carrying a Zacks Rank #3, has expected earnings growth of 420.3% for the current year. ALB has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 16.6%.
Price and Consensus: ALB
Univar: Illinois-based Univar is a leading commodity and specialty chemical and ingredient distributor. It is benefiting from market share gains, operational execution, acquisitions, cost minimization and a robust liquidity position. UNVR remains committed to cost-cutting, expense management and productivity actions that are helping it minimize operational costs and boost margins.
The acquisition of Nexeo Solutions has also enhanced the company’s capabilities and accelerated its ability to create significant value for customers, supplier partners, employees and shareholders. The buyout of Brazilian ingredients and specialty chemicals distributor Sweetmix is also anticipated to drive growth for the company’s Food Ingredients portfolio in Brazil and generate growth and cost synergies.
Univar, carrying a Zacks Rank #3, has a projected earnings growth rate of 56.8% for the current year. UNVR's consensus estimate for the current year has been revised 2.7% upward over the last 60 days. It beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 16.8%.
Price and Consensus: UNVR
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4 Diversified Chemical Stocks to Watch Amid Industry Woes
The Zacks Chemicals Diversified industry is grappling with raw material cost inflation as well as higher supply-chain, energy and logistics costs, made worse by the Russia-Ukraine conflict. Semiconductor shortage, which is hurting the automotive sector, and pandemic-related restrictions in China may also impact demand for chemicals.
Industry players like Air Products and Chemicals, Inc. (APD - Free Report) , Albemarle Corporation (ALB - Free Report) , Univar Solutions Inc. and Innospec Inc. (IOSP - Free Report) are banking on strategic measures, including operating cost reductions and aggressive price hikes to tide over the challenging environment.
About the Industry
The Zacks Chemicals Diversified industry consists of manufacturers of basic chemicals, plastics, specialty chemicals and agricultural chemicals. Companies in this space serve a host of end markets, such as automotive, building & construction, transportation, electronics, aerospace and agriculture. Basic chemicals are produced in large quantities, and include petrochemicals and intermediates (such as ethylene, propylene and benzene), polymers (including plastic resins such as polyethylene, polypropylene and polyvinyl chloride), and inorganic chemicals (such as chlorine, caustic soda and titanium dioxide). Specialty chemicals that include catalysts, specialty polymers and coating additives are used in specific fields based on their performance. Agricultural chemicals include herbicides, fungicides and insecticides that are used to protect crops from disease, pests and weeds.
What's Shaping the Future of the Chemicals Diversified Industry?
Higher Input Costs Pose Margin Headwinds: The industry players are exposed to cost pressure associated with raw materials resulting from short supply. These companies also face challenges arising from higher supply-chain and logistics costs. The disruption in the supply chain has pushed up the prices of inputs. Russia's invasion of Ukraine and new government-mandated lockdowns in China have also put more pressure on the already strained global supply chain. These companies are also facing headwinds from higher energy costs, especially in Europe, which has witnessed a significant spike in costs amid the ongoing war in Ukraine. The lingering impacts of these bottlenecks are expected to continue over the short term. Higher raw material, energy and logistics costs are, thus, likely to hurt the margins of diversified chemical companies.
Demand Worries From Chip Crunch, China Slowdown: Companies in the chemical-diversified space face headwinds from the slowdown in the global automotive industry. The semiconductor shortage has led to reduced automotive builds around the world, causing a slowdown in chemical demand in this major market. The Russia-Ukraine conflict has triggered a fresh round of global microchip shortage. Both these countries are major suppliers of raw materials required for global semiconductor production. The chip crisis is unlikely to abate anytime soon, given the impact of the war. The slowdown in automotive production may create a short-term demand headwind. The slowdown in economic activities in China due to the restrictions following a resurgence in COVID-19 infections is also impacting chemical demand. The restrictions in China have resulted in a higher level of near-term economic uncertainty, which may continue to affect chemical volumes.
Strategic Actions to Aid Results: The companies in this space are taking a host of strategic measures, including cost-cutting and productivity improvement, operational efficiency improvement and actions to strengthen the balance sheet and boost cash flows. In particular, the industry participants are aggressively implementing actions to bring down costs. These include the reduction of discretionary spending and traveling expenses. The industry players are also raising selling prices to counter raw material and logistics cost inflation. These moves are likely to help the industry in sustaining margins amid the prevailing challenges.
Zacks Industry Rank Indicates Downbeat Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #186, which places it at the bottom 25% of more than 250 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.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms S&P 500
The Zacks Chemicals Diversified industry has outperformed the Zacks S&P 500 composite while modestly underperforming the broader Zacks Basic Materials sector over the past year.
The industry has lost 0.7% over this period compared with the S&P 500’s decline of 16.3% and the broader sector’s decline of 0.1%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the 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 7.84X, below the S&P 500’s 12.18X and above the sector’s 7.27X.
Over the past five years, the industry has traded as high as 13.44X, as low as 5.38X and at the median of 8.03X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 Chemicals Diversified Stocks to Keep a Close Eye on
Innospec: Colorado-based Innospec makes and markets a wide range of specialty chemicals to markets in the Americas, Europe, the Middle East, Africa and Asia-Pacific. It is witnessing a recovery across all its businesses from the pandemic-led slowdown. Strength in the personal care segment is driving sales in the company’s Performance Chemicals division.
IOSP’s investment in capacity expansion will also offer incremental growth opportunities in this business. Its Fuel Specialties unit is benefiting from the expansion of technologies in areas such as renewable diesel, low-sulfur marine fuel and gasoline direct injection engines.
Innospec carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 30.4% for the current year. The Zacks Consensus Estimate for IOSP's current-year earnings has been revised 5.7% upward over the last 60 days. The company beat the Zacks Consensus Estimate for earnings in each of the last four quarters at an average of roughly 25.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: IOSP
Air Products: Based in Pennsylvania, Air Products is a leading industrial gases company. It is benefiting from investments in high-return projects, new business deals, acquisitions and productivity initiatives. It remains committed to its gasification strategy and is executing its growth projects. These projects are expected to be accretive to earnings and cash flows.
Air Products is also boosting productivity to improve its cost structure. APD is seeing the positive impacts of its productivity actions. Benefits from additional productivity and cost improvement programs are likely to support its margins. Air Products also has been benefiting from higher pricing. Higher merchant demand is also driving its volumes.
Air Products, a Zacks Rank #3 (Hold) stock, has expected earnings growth of 9.3% for the current fiscal year. APD beat the Zacks Consensus Estimate in each of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 1.7%.
Price and Consensus: APD
Albemarle: North Carolina-based Albemarle is a premier specialty chemicals company with leading positions in attractive end markets globally. It is benefiting from higher volumes in its lithium business on continued recovery in global economic activities. Healthy customer orders and plant productivity improvements are supporting volumes. Higher lithium prices due to tight market conditions are also supporting its performance. Its bromine business is also gaining from higher demand, a rebound in certain end markets, higher pricing and cost-saving actions.
ALB is seeing strong demand for flame retardants. The company is also strategically executing its projects aimed at boosting its global lithium derivative capacity. It remains focused on investing in high-return projects to drive productivity. Albemarle is also benefiting from cost-saving and productivity initiatives.
Albemarle, currently carrying a Zacks Rank #3, has expected earnings growth of 420.3% for the current year. ALB has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 16.6%.
Price and Consensus: ALB
Univar: Illinois-based Univar is a leading commodity and specialty chemical and ingredient distributor. It is benefiting from market share gains, operational execution, acquisitions, cost minimization and a robust liquidity position. UNVR remains committed to cost-cutting, expense management and productivity actions that are helping it minimize operational costs and boost margins.
The acquisition of Nexeo Solutions has also enhanced the company’s capabilities and accelerated its ability to create significant value for customers, supplier partners, employees and shareholders. The buyout of Brazilian ingredients and specialty chemicals distributor Sweetmix is also anticipated to drive growth for the company’s Food Ingredients portfolio in Brazil and generate growth and cost synergies.
Univar, carrying a Zacks Rank #3, has a projected earnings growth rate of 56.8% for the current year. UNVR's consensus estimate for the current year has been revised 2.7% upward over the last 60 days. It beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 16.8%.
Price and Consensus: UNVR