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3 Chemical Stocks to Enrich Your Portfolio This Earnings Season - Earnings ESP

3 Chemical Stocks to Enrich Your Portfolio This Earnings Season

The chemical industry is finally clawing its way back after going through a rough patch in 2013. With the U.S. economy getting its groove back, the first half of 2014 showed encouraging demand trends for chemicals and continued recovery across end-use markets such as commercial construction and electronics after being in a rut for the most part of last year.

According to the latest monthly report from the American Chemistry Council (ACC), U.S. chemical output rose on a monthly basis for the eighth straight month in Aug 2014, manifesting that the industry has sailed out of troubled waters and remains very much on the road to recovery in the second half.

The outlook also paints an encouraging picture as the ACC expects national chemical production to move up 2.5% in 2014 and further rise to a 3.5% gain next year. Growth will be backed by strong agricultural market fundamentals, healthy demand from light vehicles market and a recovery in the housing market.

Agriculture and health and nutrition have emerged as lucrative markets and major chemical makers are increasingly shifting their focus on these markets in an effort to cut their exposure on businesses that are grappling with weak demand and input costs pressure.

Moreover, the shale gas boom is expected to drive investment on plants and equipment in the U.S. Chemical makers are ratcheting up investment on shale gas-linked projects to take advantage of ample natural gas supplies which is expected to boost capacity and export over the next several years.

Affordable natural gas and ethane (derived from shale gas) offer U.S. producers a compelling cost advantage over their global counterparts who use a more expensive, oil-based feedstock. The U.S. has emerged as an attractive investment hotspot and chemical makers are aggressively expanding capacity in the country by setting up crackers that produce ethylene from ethane.

The ACC expects strong capital spending in the coming years, stemming from new investments in petrochemicals and derivatives. According to the trade group, potential domestic chemical investment related to share gas has reached as high as $100 billion, more than 50% of which are from firms outside of the U.S.

Within the Zacks Industry classification, the chemical industry falls under the broader Basic Materials sector. Looking at the overall results of this sector, earnings for 14.3% of the sector participants in the S&P 500 index reported so far are up 180.4% in third-quarter 2014 with a healthy beat ratio (the percentage of companies coming out with positive surprises) of 66.7%. Earnings for the sector for the third quarter are projected to move up 10.2%, an improvement from an 8.6% rise in the second.

With the earnings season hitting full throttle, it would be prudent to bet on a few chemical companies that have the potential to beat earnings estimates in their forthcoming releases.

How to Pick the Winners?

Given the large number of players operating in the chemicals space, picking the right stocks is apparently not an easy task. But our proprietary methodology makes it fairly simple. Instead of boiling the ocean, one can trim down the list with the combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Zacks Earnings ESP .

Earnings ESP - the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate - is our proprietary methodology for determining stocks that have high chances of notching up earnings surprises in their next announcements. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as much as 70%.

Below we list 3 chemical stocks having the right combination of elements to rack up positive surprises this earnings season:

Westlake Chemical Corp. ( WLK )

The Houston, TX-based company makes and supplies petrochemicals, polymers and building products. Its products have application across an array of industries including automotive, flexible and rigid packaging, coatings, and residential and commercial construction.

The company, which operates through Olefins and Vinyls divisions, is well placed to gain from its acquisition of Germany-based leading producer of specialty polyvinyl chloride (PVC) resins - Vinnolit Holdings GmbH. The acquisition has boosted the company's global chlorvinyl footprint and added key specialty PVC products and technology to its portfolio.

Westlake is also seeing cost benefits from North American shale gas production and remains committed to beef up ethylene capacity. The company's wide product range coupled with its cost saving measures and innovations positions it well for solid gains in the future.

This Zacks Rank #1 stock has a long-term expected earnings growth rate of around 15.4%. It has delivered a year-to-date return of roughly 26.5%, outperforming the S&P 500 return of 6.7%. The Zacks Consensus Estimate for the third quarter is pegged at $1.55 with an Earnings ESP of +2.58%. The company has delivered positive earnings surprises in 3 of the last 4 quarters, with an average beat of roughly 5.3%.

Westlake will release its third-quarter results ahead of the bell on Nov 6.

LyondellBasell Industries NV ( LYB )

The Netherlands-based company is among the leading plastics, chemical and refining companies globally with operations across 18 countries. Its products are used across a bevy of industries including electronics, automotive parts, packaging, construction materials and biofuels.

LyondellBasell is gaining from favourable North American natural gas environment and is executing its expansion projects to leverage the U.S. natural gas liquids (NGLs) advantage. LyondellBasell remains on track with its ethylene expansion projects across its Channelview, La Porte and Corpus Christi facilities in Texas which, when complete, is expected to increase annual ethylene capacity in North America by 1.85 billion pounds.

This Zacks Rank #2 stock has a long-term expected earnings growth rate of roughly 10.7%. The Zacks Consensus Estimate for the third quarter is pegged at $2.26 with an Earnings ESP of +2.21%. The company has delivered positive earnings surprises in 2 of the last 4 quarters, with an average beat of around 14.6%.

LyondellBasell will report its third-quarter results before the opening gong on Oct 24.

Ashland Inc. ( ASH )

The Covington, KY-based company offers specialty chemicals in more than 100 countries. It markets Valvoline, the world's first lubricating oil. Ashland, in Aug 2014, completed the sale of its Water Technologies unit for roughly $1.8 billion which has allowed it to focus on its core specialty chemicals business and boost shareholder returns.

Ashland is poised for growth on higher demand in the core markets that it serves. The company is disposing non-core assets and reinvesting in higher-margin, specialty chemical businesses that offer attractive growth opportunities. The company's ongoing restructuring initiatives coupled with its cost savings measures and continued actions to improve its core businesses is expected to help it to achieve EBITDA margins that rank among the top 25% of its specialty chemicals peer group.

This Zacks Rank #3 stock has Earnings ESP of 2.21% and a long-term expected earnings growth rate of 11.5%. The Zacks Consensus Estimate for fiscal fourth quarter is pegged at $1.36. The company has delivered positive earnings surprises in 3 of the last 4 quarters, with an average beat of around 3.2%.

Ashland will report its fourth-quarter fiscal 2014 results after the close on Nov 5.

The Road Ahead

While some industry-specific challenges and slow economic recovery in Europe remain roadblocks, the chemical industry is expected to continue to recuperate through the balance of 2014, invigorated by cost benefits from a shale gas bounty in the U.S., strength across agriculture and automotive markets, and significant shale-linked capital investment.

Strength across agriculture and automotive markets in North America and healthy demand in emerging geographies represent tailwinds for the industry. A gradually convalescing housing market also augur well for recovery prospects this year and the next.

Amid such a backdrop, a sneak peek at the space for some potential winners backed by a solid Zacks Rank and a positive Earnings ESP could be a great idea for investors looking to gain from this earnings season.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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