Chemical Specialty Industry Outlook Rosy Despite Trade Woes

The Zacks Chemicals Specialty industry consists of manufacturers of specialty chemical products for a host of end-use markets such as textile, paper, automotive, electronics, personal care, energy, construction and agriculture. These chemicals (including catalysts, surfactants, speciality polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose. They have application in the manufacturing process of a vast range of products including paints and coatings, cosmetics, petroleum products, inks, and plastics.

Here are the industry’s three major themes:

• The chemical specialty industry is benefiting from healthy demand in key end-use markets such as construction, automotive, agriculture and energy. Rising housing construction activities, especially in Asia, and higher automotive production are driving demand for paints and coatings. Moreover, an ever-growing world population and the concomitant need to beef up food supply to feed more mouths remains a prime catalyst for growth in demand for agricultural chemicals. Higher exploration and drilling activities globally to address rising energy needs are also pushing up demand for oilfield chemicals.
  
• Chemical specialty companies remain focused on strategic actions including cost-cutting and productivity improvement, expansion into high-growth markets, operational efficiency improvement, and expansion of scale through acquisitions. Moreover, a number of companies are taking aggressive price increase actions in the wake of raw material cost inflation. These actions should reap industry-wide margin benefits.
  
• U.S.-China trade tensions remain a drag on the industry. The United States and China had imposed billions of dollars in punitive tariffs on each others’ products last year. China’s tariffs on American products include a wide range of chemical products, including specialty chemicals. The tariffs currently in place are doing damage to the chemical specialty industry. China is one of the biggest export markets for U.S. chemicals. Beijing’s retaliatory tariffs have created an uncertain demand environment for U.S. chemical products in this significant market. The tariffs are hurting U.S. chemical exports.

Zacks Industry Rank Indicates Encouraging Prospects

The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #101, which places it at the top 40% 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 upbeat 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 specialty chemical stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Outperforms Sector and S&P 500

The Zacks Chemicals Specialty industry has outperformed the Zacks S&P 500 composite over the past year. The industry has gained 7.5% over this period compared with the S&P 500’s rise of 6%. Meanwhile, the broader Zacks Basic Materials Sector tumbled 10.5% over the past year.

One-Year Price Performance

Industry’s Current Valuation

On the basis of 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 23.28X, above the S&P 500’s 11.29X and the sector’s 8.58X.

Over the past five years, the industry has traded as high as 26.34X, as low as 9.74X, and at a median of 23.11X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

Enterprise Value/EBITDA (EV/EBITDA) Ratio

Bottom Line

While chemical specialty companies face the heat from trade tensions, they should gain from strategic actions such as continued focus on cost and productivity, expansion moves and earnings-accretive acquisitions. Growth in major end-use markets such as automotive and construction should also act as a catalyst for the industry.

We are presenting four stocks sporting a Zacks Rank #1 (Strong Buy) that are well positioned to grow. You can see the complete list of today’s Zacks #1 Rank stocks here.

Israel Chemicals Ltd. (ICL): This Israel-based company has expected earnings growth of 13.5% for 2019. The company delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 13.7%. It also has an estimated long-term earnings growth rate of 9.5%.

Price and Consensus: ICL

Axalta Coating Systems Ltd. (AXTA): The Pennsylvania-based company has expected earnings growth of 35.2% for 2019. The Zacks Consensus Estimate for earnings for the current year has gone up 10.2% in the last 60 days. The company delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 19.6%.

Price and Consensus: AXTA

Flexible Solutions International Inc. (FSI): This Canada-based company has expected earnings growth of 342.9% for 2019. The Zacks Consensus Estimate for earnings for the current year has gone up 63.2% in the last 60 days.

Price and Consensus: FSI

Westlake Chemical Partners LP (WLKP): The Texas-based company has expected earnings growth of 39.7% for 2019. It also has an estimated long-term earnings growth rate of 9.5%.

Price and Consensus: WLKP

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