For Immediate Release
Chicago, IL – November 25, 2022 – Today, Zacks Equity Research discusses Ashland Inc. ASH, Livent Corp. LTHM, Ingevity Corp. NGVT and Flexible Solutions International Inc. FSI.
Industry: Specialty Chemical
The Zacks Chemicals Specialty industry is facing headwinds from the softness in the automotive sector due to the chip crunch and demand slowdown in Europe and China. Margins of companies in this space also remain under pressure due to elevated supply chain, logistics and input costs.
Industry players like Ashland Inc.,Livent Corp, Ingevity Corp. and Flexible Solutions International Inc. are banking on strategic measures, including operating cost reductions to tide over a still-challenging environment.
About the Industry
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, food & beverages and agriculture. These chemicals (including catalysts, surfactants, specialty polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose.
Specialty chemicals can be single molecules or a combination of molecules referred to as formulations, and they provide a vast range of effects on which various industries rely upon. Their compositions significantly influence the performance of the finished products. Specialty chemicals have applications in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.
What's Shaping the Future of the Chemical Specialty Industry?
Headwinds From Demand Slowdown: Companies in the chemical specialty space face challenges from a slowdown in demand in the automotive space, a major market. The semiconductor shortage is affecting automotive production globally, which may create a short-term demand headwind.
The chip crunch has led to reduced automotive builds around the world, causing a slowdown in demand for specialty chemicals. 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. Depressed automotive production is likely to impact the volumes of specialty chemical companies over the near term.
The companies in this space also faces headwinds from customer destocking and softness in building and construction and industrial end markets, especially in Europe and China, due to the economic slowdown. New lockdowns are taking a significant toll on China's economy. Moreover, the ongoing geopolitical tension, elevated energy costs and high inflation have led to a decline in demand in Europe.
Input Cost Pressure a Concern: Specialty chemical makers are facing headwinds from raw material cost inflation, and supply-chain and freight transportation disruptions. The closure of a large swath of factories to stem the spread of the COVID-19 outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the chemical specialty industry. Some of the companies are also facing challenges from elevated logistics and labor costs.
The shipping bottlenecks have led to a surge in freight costs. The Russia-Ukraine conflict and new lockdowns in China following a resurgence in coronavirus infections have increased the pressure on an already-strained global supply chain. The lingering impacts of supply chain and logistic bottlenecks are expected to continue over the short haul and exert pressure on the margins of chemical specialty companies.
Strategic Actions to Aid Results: The companies in this space are executing a raft of self-help measures — including cost-cutting and productivity improvement, expansion into high-growth markets, restructuring, operational efficiency improvement, and actions to strengthen the balance sheet and boost cash flows — in a bid to stay afloat amid the prevailing supply chain and pandemic-induced headwinds. Notably, the industry participants are aggressively implementing actions to cut costs. The measures are likely to help the companies sail through the ongoing challenges.
Zacks Industry Rank Indicates Downbeat Prospects
The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #230, which places it at the bottom 8% 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.
Despite the industry's bleak near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, it's worth taking a look at the industry's stock market performance and current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Chemicals Specialty industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has lost 29% over this period compared with the S&P 500's decline of 17.4% and the broader sector's decrease of 7.1%.
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 11.51X, below the S&P 500's 11.97X and above the sector's 7.04X.
Over the past five years, the industry has traded as high as 40.85X, as low as 10.61X, with a median of 23.99X.
4 Chemical Specialty Stocks to Keep a Close Eye On
Flexible Solutions: Canada-based Flexible Solutions specializes in biodegradable, water-soluble products as well as energy and water conservation products for drinking water, agriculture and industrial markets. The company remains committed to exploring new opportunities in applications such as detergent, water treatment, oil field extraction and agriculture to further grow sales in the NanoChem division, which accounts for more than half of the company's revenues.
FSI should also benefit from its strategic investments in Lygos for sustainable aspartic acid. Its cash resources are also expected to be adequate to meet its cash flow requirements and future commitments.
Flexible Solutions, carrying a Zacks Rank #2 (Buy), has expected earnings growth of 57.1% for the current year. The Zacks Consensus Estimate for earnings for the current year for FSI has been revised 12.8% upward over the last 60 days. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Ashland: Delaware-based Ashland is a leading specialty chemicals company serving a vast range of consumer and industrial markets. It is benefiting from strong demand in its end markets. Its industrial businesses are witnessing strong demand recovery. Ashland is seeing higher demand across core personal-care end markets.
The company is also gaining from the contributions from the Schulke & Mayr acquisition. Ashland's restructuring actions have also provided it with a profitable, high-margin portfolio focused on high-quality markets and better positioned it for future growth. The company's pricing and mix improvement actions are also helping it to counter the current inflation.
Ashland, carrying a Zacks Rank #3 (Hold), has expected earnings growth of 8.9% for the current year. The Zacks Consensus Estimate for earnings for the current year for ASH has been revised 2.1% upward over the last 60 days.
Livent: Pennsylvania-based Livent is a vertically integrated lithium producer. LTHM is benefiting from strong demand and higher lithium pricing, aided by strong market conditions. Lithium demand is being driven by higher electric vehicle sales and battery installations for EVs. Higher realized pricing is expected to drive the company's top line and margins. Tight supply-demand conditions are supporting prices.
Livent, carrying a Zacks Rank #3, has expected earnings growth of 655.6% for the current year. The company also surpassed the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 21.9%, on average.
Ingevity: South Carolina-based Ingevity is a global producer of high-performance activated carbon materials and specialty chemicals. It is benefiting from higher demand and prices in its industrial specialties and engineered polymers businesses. NGVT is seeing continued recovery in demand for its industrial specialties products from the pandemic-induced slowdown, leading to higher volumes and prices. Ingevity is also taking several actions to expand capacity and drive long-term growth. The acquisition of Ozark Materials will also strengthen the company's position in the paving construction industry.
Ingevity, carrying a Zacks Rank #3, has expected earnings growth of 23.1% for the current year. The consensus estimate for earnings for the current year for NGVT has been revised 6.4% upward over the last 60 days. The company also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 20.1%.
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