During the first quarter of 2014 the U.S. experienced a polar
vortex that reigned in any attempted green shoots, and posted a
negative 0.1% growth rate for the quarter. But a nice bounce
in April, and May have given hope to the economy as a whole.
Economic indicators are now showing a renewed vigor within the
economy, and the Federal Reserve's Beige Book indicated activity
expanded in recent weeks.
In May new orders at factories rose to a five-month high, which
triggered businesses to increase their inventory. The
Institute for Supply Management stated that their index of national
factory activity increased from 54.9 in April, to 55.4 in
May. Also, the financial information services company Markit,
stated that their U.S. manufacturing Purchasing Managers Index
increased from 55.4 in April, to 56.4 in May (anything above 50
indicates expansion for both models).
Manufacturing is not the only area of expansion, according to the
U.S. Commerce Department the expansion of construction spending,
which increased 0.2% in April to an annual rate of $953.5 billion,
marks the highest level since March of 2009. Most of the
construction was due to government public outlays, up 0.8%, and
spending on local, state, and federal projects are increasing year
over year, suggesting that public construction is rebounding after
a decline for the past several years.
So with an improving economy, increasing inventories, and a surging
manufacturing base, what industry would benefit from all this
expansion? Basic Materials, to which Chemicals and Plastics is a
sub industry. This industry, basic materials, is economically
sensitive to swings in manufacturing and construction.
Chemicals and Plastics!
The Chemical/Plastics industry is seeing robust growth with the
improving economy. The industry impacts a diverse
manufacturing array, such as; Military, Electronics, Toys (related
consumer goods), Automotive, Food (rumored that companies are
playing with amino acids to be packaged in a way as to utilize a 3D
printer to "print out" new foods), Technology, and Construction to
highlight a few.
This industry impacts many manufacturing and construction
companies, and as the product demand increases, we should expect to
see a flood of orders coming in for chemicals, and plastics.
Companies to Consider
A. Schulman Inc
), a Zacks Rank #1 (Strong Buy), supplies plastic compounds and
resins for packaging, automotive, consumer products, and industrial
applications. The company's products are also used in a range
of other markets, such as mobility, building and construction,
electronics and electrical, agriculture, personal care and hygiene,
custom services, sports, leisure, and home.
As you can see, this company will be positively impacted by
increased manufacturing and construction. Moreover, SHLM
recently acquired the assets of the Specialty Plastics business
segment from Ferro Corporation for $91 million in cash. The
deal is supposed to be accretive to adjusted earnings per share,
and the company expects about $5.5 million in synergies within
12-18 months. This acquisition will give SHLM a broad
portfolio of proprietary products serving a large range of end
markets comprising of packaging, transportation, construction,
appliances, and agriculture. These new end market products
carry higher margins.
Over the past sixty days, Q2 earnings estimates have risen from
$0.63 to $0.65, and Q3 earnings estimates has increased from $0.63
to $0.67. Moreover, this company has a solid track record of
beating earnings estimates, and holds an average earnings positive
surprise of 8.76% over the past four quarters. Finally, this
company has been paying a solid dividend since 1972, and is
currently yielding 2.17%.
WestLake Chemical Corp
), a Zacks Rank #1 (Strong Buy), manufactures and markets basic
chemicals, vinyls, polymers, and fabricated building
products. The company's products are used in various
applications, such as consumer and industrial markets comprising
flexible and rigid packaging, automotive products, coatings, and
residential and commercial construction, as well as in other
durable and non-durable goods.
Like our other Zacks #1, this company is positioned to profit from
the heightened manufacturing and construction production and
demand. To better position themselves, WLK recently acquired
Vinnolit Holdings GmbH, a German-based chlor-vinyls producer for
$666 million. This acquisition enables WestLake to diversify
its exposure beyond North America, adds specialty PVC (third most
widely produced polymer), and it improves their international
distribution capabilities. The deal would make WestLake the
sixth largest global producer of PVC. This deal is expected
to close in the beginning of Q3 2014.
Over the past sixty days, Q2 earnings estimates have increased from
$1.34 to $1.42, as well as Q3 earnings, up from $1.33 to
$1.42. For the FY 2014 earnings estimates have risen from
$5.08 to $5.35. Furthermore, this company has a strong
history of beating earnings estimates, and currently holds an
average four quarter positive surprise of 11.12%.
), a Zacks Rank #2 (Buy), provides specialized polymer materials,
services, and solutions with operations in specialty polymer
formulations, color and additive systems, and polymer
distribution. The company also offers stock and custom
packaging solutions for various industry processes that are used in
the food, medical, consumer, and graphic arts markets.
PolyOne's management team recently stated that their main goal was
to double revenues from $3.8 billion in 2013 to $8-$10 billion in
2020. Furthermore, the company plans to utilize their
Specialty Platform Segment (very high margins), which generated 5%
of the company's total EBIT in 2006, and now accounts for 62% in
2013, to focus on innovation; expected to account for 80-90% of
total EBIT by 2020. The company is also in the process of
repurchasing their shares; purchased 1.4 million shares in Q1 2014,
and plans on purchasing another 3.6 million shares by Q1 2015.
Over the past sixty days, Q3 earnings estimates have risen from
$0.49 to $0.50, and FY 2014 earnings estimates have increased from
$1.76 to $1.80. This company has a history of beating earnings
estimates, and currently holds an average positive earnings
surprise of 9.21% over the past four quarters.
As the U.S. economy continues to pick up steam, we should look to
companies that help facilitate expansion in several key areas, such
as manufacturing, and construction. All key indicators are
pointing to increased demand for goods and services, and thus,
manufacturing and construction companies are increasing their
inventories to meet the demand. To meet this demand, they
need the raw materials, think chemicals and plastic, to facilitate
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