For Immediate Release
Chicago, IL – April 03, 2017 – Today, Zacks Equity Research discusses the Industry: Chemicals, Part 2, including Dow Chemical (NYSE: DOW – Free Report ), DuPont (NYSE:DD) (NYSE: DD – Free Report ), Albemarle Corp. (NYSE: ALB – Free Report ), Syngenta (NYSE: SYT – Free Report ) and Monsanto Company (NYSE:MON) (NYSE: MON – Free Report ).
Industry: Chemicals, Part 2
Link: https://www.zacks.com/commentary/108328/chemical-industry-back-on-track-stocks-worth-a-look
The chemical industry is back on the growth path after being stuck in a rut, making it an attractive investment proposition for 2017. Strength in the automotive sector and a rebound in non-residential construction and housing markets have helped pull the industry out of its funk, notwithstanding a persistently challenging global economic environment.
Despite a few industry-related headwinds, weak demand across agricultural and energy markets and sluggishness in China, there are a number of reasons to be optimistic about the broader chemical industry for both the short and long haul. Let’s find out what’s supporting the bullish case for chemical stocks.
Shale Bounty – Driving Force for Chemical Spending
The shale gas revolution in the U.S. has been a huge driving force behind chemical investment on plants and equipment in the country. According to the American Chemistry Council (ACC), the U.S. has emerged as an attractive investment location and petrochemical makers are now significantly expanding capacity in the country leveraging new supplies of natural gas. New methods of extraction such as horizontal drilling and hydraulic fracturing (or fracking) are boosting shale production, bringing down prices of ethane (derived from shale gas) in the process.
The shale boom has incentivized a number of chemical companies to pump in billions of dollars for setting up facilities (crackers) in the U.S. to produce ethylene and propylene in a cost-effective way. Per the ACC, over 275 new chemical projects have been announced by chemical makers (worth more than $170 billion) since 2010, nearly half of which already complete or under construction. Such investments -- many backed by Federal government support -- are expected to boost capacity and export over the next several years.
Automotive – Healthy Run Continues
Chemical makers continue to see healthy demand from the automotive sector -- a major end-use market. The sector is enjoying the fruits of low fuel prices. The last two years have been exceptional for the auto sector. Sales in the U.S. saw record highs in both years, while sales in China and Europe also gained strength.
U.S. light vehicles (a key end-user market for chemicals) continued to show strength in 2016, supported by an improving job market, rising personal income, improved consumer confidence, low fuel prices and attractive financing options. A high average age of cars on the U.S. roads is also fueling replacement demand for cars. U.S. sales of new cars and trucks hit a record high of 17.55 million in 2016, rising 0.4% from 2015's record of 17.47 million.
According to IHS Markit, global light vehicle sales are expected to increase 1.5% year over year to 93.5 million units in 2017. Moreover, IHS Markit sees U.S. light vehicle sales to reach 17.4 million units in 2017 -- a slight moderation compared with the 2016 level, but still looks poised for another strong year.
Low interest rates, favorable financing and cheap oil have also backed a recovery in the European auto market. The auto industry in Asian countries, especially China, is also expected to thrive over the next several years. Healthy momentum in the automotive space augurs well for chemical demand in this important end-market.
A Rebound in Construction Sector
A recovery across housing and commercial construction -- major chemical end-markets -- has been another supporting factor for the chemical industry recovery. After being hit hard in the recession, the construction sector has bounced back on the back of strong housing fundamentals.
The underlying demand trends in the housing space remain strong, supported by an improving employment levels, affordable interest/mortgage rates and a rise in income levels. The year 2016 was reasonably good for the housing market, and the momentum is expected to continue this year.
Recent housing data has been fairly upbeat with U.S. housing starts scaling a four-month high in February, buoyed by construction of single-family houses that rose 6.5% to reach its highest level in nearly a decade. Housing starts rose 3% to a seasonally adjusted annualized rate of 1.29 million units in February, per the Commerce Department. Homebuilding was up 6.2% year over year for the month. These data paint an upbeat picture for U.S. homebuilding.
The renewal of long-stalled construction projects and long awaited access to credit from lending institutions has also helped invigorate the commercial construction sector. U.S. architecture firm billings continue to rise. The US Architecture Billings Index (ABI), an indicator that offers a glimpse into the future of U.S. non-residential construction spending activity, clocked 50.7 in February 2017 (a reading above 50 indicates an increase in billings), up from 49.5 in January.
Moreover, the American Institute of Architects (AIA) expects healthy growth in non-residential construction spending this year based on strong growth expectations for hotels, office space and retail. The AIA sees spending to go up 5.6% in 2017 and 4.9% in 2018.
Trump’s $1 Trillion Spending Boost
The U.S. chemical industry is expected to be one of the key beneficiaries of Donald Trump's presidency. Chemical stocks got a boost following Trump’s election win in November on expectations of significant infrastructure spending in a Trump administration.
Trump has pledged to pump $1 trillion of new infrastructure spending into the U.S. economy, aimed at fixing America's "crumbling" infrastructure. The president has called on Congress to pass a bill that would produce a $1 trillion investment in the national infrastructure to rebuild roads, bridges and other public infrastructure, and create millions of new jobs.
The president’s call for the massive infrastructure spending -- one of his key campaign promises -- is likely to have a beneficial effect on the U.S. chemical industry given the expected increase in demand for chemicals used in construction.
Chemical Bonding – M&A Gathering Steam
Chemical makers remain actively focused on mergers and acquisitions to diversify and shore up growth in a still-difficult global economic environment. The industry saw a pick-up in consolidation activities in 2015 and the momentum continued in 2016.
Chemical companies are increasingly looking for cost synergy opportunities and enhanced operational scale through consolidations. The $130 billion mega-merger of Dow Chemical (NYSE: DOW – Free Report ) and DuPont (NYSE:DD – Free Report ) -- the biggest chemical deal ever -- is a huge testimony to these strategic moves.
Other major deals that have taken place in the chemical space in the recent past include Albemarle Corp.’s (NYSE: ALB – Free Report ) $6.2 billion buyout of Rockwood Holdings, Inc., Merck (NYSE:MRK) KGaA's $17 billion acquisition of Sigma-Aldrich, ChemChina’s proposed $43 billion acquisition of Syngenta (NYSE:SYT – Free Report ), and the $66 billion proposed merger between Monsanto Company (NYSE: MON – Free Report ) and Bayer AG (DE:BAYGN).
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has nearly tripled the market from 1988 through 2015. Its average gain has been a stellar +26% per year. See these high-potential stocks free >>.
Get the full Report on DOW - FREE
Get the full Report on DD - FREE
Get the full Report on ALB - FREE
Get the full Report on SYT - FREE
Get the full Report on MON - FREE
Follow us on Twitter: https://twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Dow Chemical Company (The) (NYSE:DOW
E.I. du Pont de Nemours and Company (DD): Free Stock Analysis Report
Albemarle Corporation (ALB): Free Stock Analysis Report
Syngenta AG (SIX:SYNN
Monsanto Company (MON): Free Stock Analysis Report
Original post
Zacks Investment Research