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5 Chemical Stocks Set to Run Higher Despite Supply-Chain Woes

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·7-min read
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The chemical industry has staged a comeback from the coronavirus-led downturn on a recovery in industrial demand. The industry reeled under the effects of demand shocks for much of the first half of last year as global industrial activities were put to a halt amid the pandemic.

However, with the easing of restrictions on business activities globally and an economic rebound in China — a top consumer of chemicals — demand for chemicals started to pick up from the third quarter of 2020. The upturn in demand is being driven by an upswing in manufacturing and industrial activities globally.

Chemical makers are benefiting from a strong rebound in demand in key end-use markets including automotive, building & construction and electronics. Healthy demand in automotive and construction is driving their sales volumes as witnessed in the second quarter of 2021. These companies saw higher demand from the automotive market in the quarter notwithstanding the chip shortage which continues to affect automotive production globally. Some of them racked up record earnings in the second quarter on the back of strong demand.

However, chemical producers are grappling with raw material cost inflation as well as higher supply chain and logistics costs. Supply chain disruptions due to coronavirus and weather-related events have led to a spike in raw material costs.  Higher input costs partly due to the impacts from the devastating winter storm in the U.S. Gulf Coast — the biggest refining and petrochemical production hub in North America — weighed on margins of chemical producers in the June quarter.

Extreme weather across Texas and Louisiana and power outages disrupted the supply of feedstocks. Shutdown of ethylene plants across the United States affected the availability of ethylene — a major raw material used in the production of several industrial chemicals and plastic products including polyethene and polyvinyl chloride. The deep freeze across the U.S. Gulf Coast took roughly three-fourth of the U.S. ethylene capacity offline. U.S. Gulf Coast is home to roughly 20% of the world’s ethylene production.

Supply tightness continues for a number of key raw materials including several resins, natural gas, propylene, butadiene and glass fiber. The lingering impacts of supply chain and logistic bottlenecks, exacerbated by the recent unfavorable weather events globally and the resurgence of coronavirus infections, are expected to continue over the short term.

The supply crunch is compounded by the tropical storm Ida. Force majeures and plant shutdowns associated with Hurricane Ida that slammed into Louisiana — one of the largest chemical hubs in the United States — with devastating force on Aug 29 are expected to further squeeze the supply of raw materials including ethylene and propylene and push up their prices, impacts of which are likely to be felt on chemical companies’ September quarter results. According to IHS Markit, six facilities producing ethylene were affected by Ida accounting for roughly 16% of U.S. ethylene capacity.

Nevertheless, actions to raise selling prices of chemical products to counter the cost inflation and tightness in the supply chain, productivity improvement measures and operational efficiency improvement are likely to help the chemical industry in sustaining margins through the second half of 2021. Demand strength across key markets should also drive volume improvement.

5 Stocks Worth a Bet

Input cost inflation and supply chain constraints pose headwinds for the chemical industry over the short haul. However, self-help actions along with strong demand across major markets should help the industry to tide over these challenges.

We highlight the following five stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now. You can see the complete list of today’s Zacks #1 Rank stocks here.

Avient Corporation AVNT: Ohio-based Avient sports a Zacks Rank #1. The company is benefiting from improved demand conditions across its end markets, strength in its composite technologies and synergies of the acquisition of Clariant Masterbatch. Strong demand in consumer applications is contributing to its performance. The buyout of Magna Colours also expands its portfolio of sustainable solutions. These factors have resulted in a share price appreciation of roughly 74% over the past year.

The company has expected earnings growth of 75.1% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 5.9% 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 10.3%.

Methanex Corporation MEOH: Canada-based Methanex, sporting a Zacks Rank #1, is gaining from healthy demand for methanol on the back of the ongoing economic recovery. The company also remains committed to strengthen its balance sheet and maintain its strong liquidity position. Methanex is also benefiting from an improvement in methanol pricing. The Geismar 3 project is also expected to bolster its portfolio and support its future cash generation. These factors have contributed to its share price rally of around 74% over a year.

Methanex has expected earnings growth of 448.8% for the current year. The consensus estimate for current-year earnings has been revised 27% upward over the last 60 days.

The Chemours Company CC: Delaware-based Chemours, carrying a Zacks Rank #2, is benefiting from a rebound in demand from the coronavirus-led downturn, strong execution and its cost-cutting actions. It is witnessing the increasing adoption of the Opteon platform. Demand for Opteon remains strong in mobile and stationary applications. The company’s cost-reduction program along with its productivity and operational improvement actions across its businesses are also supporting margins. These factors have resulted in a share price gain of around 49% over a year.

Chemours has expected earnings growth of 86.4% for the current year. The Zacks Consensus Estimate for earnings for the current year has been revised 14.2% 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 38.9%.

Olin Corporation OLN: Missouri-based Olin carries a Zacks Rank #2. The company is gaining from its actions to improve its cost structure and efficiency and drive productivity through a number of projects. It is also expected to gain from cost and other benefits from its investment in the IT project. The Lake City U.S. Army ammunition contract is also driving sales and profitability of its Winchester segment. These factors have contributed to its share price rally of 325% in a year’s time.

The company has expected earnings growth of 630.4% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 20.9% upward over the last 60 days. The company also has an expected long-term earnings per share growth rate of 52.2%.

Innospec Inc. IOSP: The Colorado-based company is witnessing a recovery across all of its businesses from the pandemic-led slowdown. Strength across home and personal care segments is driving sales in the company’s Performance Chemicals division. Its investment in capacity expansion will also offer incremental growth opportunities in this business. Its Fuel Specialties unit is also benefiting from improving jet aviation fuel demand, driving a recovery in its fuel additive technology. Improving activities in the oilfield markets also bode well for its Oilfield Services unit. These factors have contributed to its share price appreciation of 28% in a year’s time.

The company, carrying a Zacks Rank #2, has expected earnings growth of 44.4% for the current year. The consensus estimate for earnings for the current year has been revised 6.9% 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 45.4%.


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Methanex Corporation (MEOH) : Free Stock Analysis Report
 
Olin Corporation (OLN) : Free Stock Analysis Report
 
Innospec Inc. (IOSP) : Free Stock Analysis Report
 
The Chemours Company (CC) : Free Stock Analysis Report
 
Avient Corporation (AVNT) : Free Stock Analysis Report
 
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