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3 Diversified Chemical Stocks to Escape Industry Headwinds
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The Zacks Chemicals Diversified industry is plagued by sluggish demand in certain markets, including consumer durables and building & construction, and some lingering impacts of consumer inventory destocking. Lower consumer spending due to inflationary pressures in Europe and a slow recovery in China are impacting demand.
Industry players like Eastman Chemical Company (EMN - Free Report) , Cabot Corporation (CBT - Free Report) and Kronos Worldwide, Inc. (KRO - 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?
Demand Headwinds From End-market Softness: Companies in the chemical-diversified space remain challenged by demand weakness in certain key markets. The sluggishness in the building & construction market and the destocking in consumer electronics are the key concerns. In North America, uncertainties surrounding the U.S. housing market are weighing on building & construction. The housing market is bearing the brunt of interest rate hikes. Softer demand in industrial and consumer durables is hurting chemical volumes. Weaker global economic activities have led to a higher level of uncertainties, which may affect chemical volumes over the near term. While the unprecedented customer inventory destocking that started in late 2022 and weighed heavily on the industry through the first quarter of 2024 is nearing completion, some lingering impacts of the same are expected to continue in the near term.
Slowdown in Europe and China a Concern: A slower recovery in economic activities in China, following the lifting of the restrictions related to the resurgence in COVID-19 infections, is hurting chemical demand in that country. Global industrial activities have been affected by a weaker demand recovery in China. The slowdown in Europe, resulting from the war in Ukraine and weaker consumer spending due to high levels of inflation and high interest rates, has also led to softer demand in that region. The energy and feedstock inflation has resulted in reduced industrial production and consumer spending in Europe. The ongoing weakness in these key regions is likely to impact demand for chemicals over the short haul.
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. The industry participants are also raising selling prices to counter cost inflation. Such moves are likely to help the industry sustain margins amid the prevailing challenges.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #239, which places it at the bottom 4% 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 a gloomy near term. 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 Underperforms Sector & S&P 500
The Zacks Chemicals Diversified industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has declined 7.8% over this period compared with the S&P 500’s rise of 23.4% and the broader sector’s increase of 1.9%.
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 10.7X, below the S&P 500’s 20.11X and the sector’s 11.94X.
Over the past five years, the industry has traded as high as 13.15X, as low as 5.33X and at the median of 8.69, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Chemicals Diversified Stocks to Keep a Close Eye on
Kronos Worldwide: Texas-based Kronos, carrying a Zacks Rank #1 (Strong Buy), is a leading international producer of titanium dioxide (TiO2) products. It is expected to gain from higher demand for TiO2. Stronger demand for TiO2 in the primary markets of Europe and North America is likely to drive its sales volumes. KRO is also expected to benefit from easing pricing pressure this year. Reduced energy costs, along with cost-reduction initiatives, are expected to support margins.
Kronos Worldwide has expected earnings growth of 297.7% for 2024. The Zacks Consensus Estimate for KRO’s earnings for 2024 has been revised upward by 157.6% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: KRO
Cabot: Massachusetts-based Cabot is a global specialty chemicals and performance materials company. It is seeing strong results in its Reinforcement Materials segment driven by higher volumes in Asia and Europe, pricing and mix improvements, and the strength in the replacement tire market. Demand in the Performance Chemicals unit has also improved as de-stocking has ended. CBT’s strong cash generation also facilitates a balanced capital allocation approach that emphasizes strategic investments, long-term earnings growth and shareholder returns while preserving a solid investment-grade balance sheet.
Cabot, a Zacks Rank #2 (Buy) stock, has expected earnings growth of 26% for fiscal 2024. The Zacks Consensus Estimate for CBT’s earnings for fiscal 2024 has been revised upward by 0.9% over the last 60 days.
Price and Consensus: CBT
Eastman Chemical: Tennessee-based Eastman Chemical is a specialty materials company offering a broad range of products, including polymers, performance films, specialty plastics, high-value additives, plasticizers and fibers, in attractive end markets. It is gaining from its innovation-driven growth model, operational execution and cost-management actions. The company remains focused on increasing new business revenues by utilizing its innovation-driven growth strategy. Pricing initiatives are also expected to support the company’s bottom line. EMN is also expected to benefit from lower operating costs from its operational transformation program. Moreover, it remains focused on maintaining a disciplined approach to capital allocation.
Eastman Chemical, carrying a Zacks Rank #3 (Hold), has expected earnings growth of 20.2% for 2024. EMN 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 5%.
Price and Consensus: EMN
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3 Diversified Chemical Stocks to Escape Industry Headwinds
The Zacks Chemicals Diversified industry is plagued by sluggish demand in certain markets, including consumer durables and building & construction, and some lingering impacts of consumer inventory destocking. Lower consumer spending due to inflationary pressures in Europe and a slow recovery in China are impacting demand.
Industry players like Eastman Chemical Company (EMN - Free Report) , Cabot Corporation (CBT - Free Report) and Kronos Worldwide, Inc. (KRO - 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?
Demand Headwinds From End-market Softness: Companies in the chemical-diversified space remain challenged by demand weakness in certain key markets. The sluggishness in the building & construction market and the destocking in consumer electronics are the key concerns. In North America, uncertainties surrounding the U.S. housing market are weighing on building & construction. The housing market is bearing the brunt of interest rate hikes. Softer demand in industrial and consumer durables is hurting chemical volumes. Weaker global economic activities have led to a higher level of uncertainties, which may affect chemical volumes over the near term. While the unprecedented customer inventory destocking that started in late 2022 and weighed heavily on the industry through the first quarter of 2024 is nearing completion, some lingering impacts of the same are expected to continue in the near term.
Slowdown in Europe and China a Concern: A slower recovery in economic activities in China, following the lifting of the restrictions related to the resurgence in COVID-19 infections, is hurting chemical demand in that country. Global industrial activities have been affected by a weaker demand recovery in China. The slowdown in Europe, resulting from the war in Ukraine and weaker consumer spending due to high levels of inflation and high interest rates, has also led to softer demand in that region. The energy and feedstock inflation has resulted in reduced industrial production and consumer spending in Europe. The ongoing weakness in these key regions is likely to impact demand for chemicals over the short haul.
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. The industry participants are also raising selling prices to counter cost inflation. Such moves are likely to help the industry sustain margins amid the prevailing challenges.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #239, which places it at the bottom 4% 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 a gloomy near term. 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 Underperforms Sector & S&P 500
The Zacks Chemicals Diversified industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has declined 7.8% over this period compared with the S&P 500’s rise of 23.4% and the broader sector’s increase of 1.9%.
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 10.7X, below the S&P 500’s 20.11X and the sector’s 11.94X.
Over the past five years, the industry has traded as high as 13.15X, as low as 5.33X and at the median of 8.69, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Chemicals Diversified Stocks to Keep a Close Eye on
Kronos Worldwide: Texas-based Kronos, carrying a Zacks Rank #1 (Strong Buy), is a leading international producer of titanium dioxide (TiO2) products. It is expected to gain from higher demand for TiO2. Stronger demand for TiO2 in the primary markets of Europe and North America is likely to drive its sales volumes. KRO is also expected to benefit from easing pricing pressure this year. Reduced energy costs, along with cost-reduction initiatives, are expected to support margins.
Kronos Worldwide has expected earnings growth of 297.7% for 2024. The Zacks Consensus Estimate for KRO’s earnings for 2024 has been revised upward by 157.6% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: KRO
Cabot: Massachusetts-based Cabot is a global specialty chemicals and performance materials company. It is seeing strong results in its Reinforcement Materials segment driven by higher volumes in Asia and Europe, pricing and mix improvements, and the strength in the replacement tire market. Demand in the Performance Chemicals unit has also improved as de-stocking has ended. CBT’s strong cash generation also facilitates a balanced capital allocation approach that emphasizes strategic investments, long-term earnings growth and shareholder returns while preserving a solid investment-grade balance sheet.
Cabot, a Zacks Rank #2 (Buy) stock, has expected earnings growth of 26% for fiscal 2024. The Zacks Consensus Estimate for CBT’s earnings for fiscal 2024 has been revised upward by 0.9% over the last 60 days.
Price and Consensus: CBT
Eastman Chemical: Tennessee-based Eastman Chemical is a specialty materials company offering a broad range of products, including polymers, performance films, specialty plastics, high-value additives, plasticizers and fibers, in attractive end markets. It is gaining from its innovation-driven growth model, operational execution and cost-management actions. The company remains focused on increasing new business revenues by utilizing its innovation-driven growth strategy. Pricing initiatives are also expected to support the company’s bottom line. EMN is also expected to benefit from lower operating costs from its operational transformation program. Moreover, it remains focused on maintaining a disciplined approach to capital allocation.
Eastman Chemical, carrying a Zacks Rank #3 (Hold), has expected earnings growth of 20.2% for 2024. EMN 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 5%.
Price and Consensus: EMN
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