3 Top Stocks From the Resurgent Chemical Plastics Industry
A rebound in industrial demand has put the wind back in the sails of the Zacks Chemicals Plastics industry. The upturn in demand across major end-use industries such as automotive, tire and construction from the pandemic-led slump augurs well for the industry.
Covestro AG (COVTY), Westlake Chemical Corporation (WLK) and Rayonier Advanced Materials Inc (RYAM) are well placed to benefit from the pick-up in demand. Self-help measures, including reduction of operating costs, are also helping these companies to navigate these turbulent times. Moreover, the shale boom is driving investments in capacity expansion in the United States.
About the Industry
The Zacks Chemicals Plastics industry consists of manufacturers of polymer materials for a host of end-use markets such as packaging, building & construction, transportation, electronics, containers and aerospace. These products include plastic resins such as polyethylene, polypropylene, polyvinyl chloride (PVC) and polystyrene that are made from raw materials sourced from crude oil and natural gas. Packaging and construction industries remain the mainstays of the chemical plastics industry.
What’s Shaping the Future of the Chemical Plastics Industry?
Revival of End-market Demand: The coronavirus pandemic led to a slowdown in industrial activities globally for much of the first half of 2020, denting demand for plastics in key end-use markets including automotive, tire, construction and textile. Weaker demand coupled with a sharp decline in oil prices also exerted pressure on the product prices of chemical plastics makers. However, demand started to improve from the third quarter with a rebound in industrial and manufacturing activities globally from the coronavirus-induced slowdown. Notably, demand for PVC resin is improving with the revival in the construction sector following easing of lockdowns and restrictions. Moreover, a rebound in the automotive sector from the virus-led slump bodes well for demand for polyethylene — the most widely consumed polymer globally — in this major market. Demand has also picked up in tire applications of late. Meanwhile, demand for polyethylene remains strong in food packaging. The pandemic has led to a surge in demand for food packaging, thanks to the rise in consumption of packed products. Higher industrial activities are expected to drive demand for plastic products moving ahead.
Shale Bounty Driving Capacity Expansion: The U.S. chemical plastics industry is enjoying the advantage of access to abundant and cheap ethane feedstock extracted from shale gas. The shale bounty has provided U.S. plastics producers a compelling cost advantage over their global counterparts, which use oil-based feedstock such as naptha. This is driving investment in plastic production projects in the U.S. Gulf Coast to beef up capacity. The shale boom has incentivized a number of companies to plough billions of dollars for setting up crackers in the United States to make key feedstocks like ethylene and propylene in a cost-effective way. Such investments should boost capacity.
Self-help Actions to Aid Results: The companies in this space are taking a host of strategic measures including structural cost reduction, operational efficiency improvement and working capital management, to stay afloat in the wake of the pandemic. In particular, the industry participants are aggressively implementing actions to whittle down costs, which include reduction of discretionary spending and traveling expenses, furloughs and salary cuts. These moves are likely to help the industry in sustaining margins amid pandemic-induced challenges.
Trade Tariffs Remains a Worry: The U.S.-China trade tiff has plagued chemical plastics makers. While the preliminary trade deal averted the implementation of a new round of tariff on chemicals and plastics, the hefty tariffs currently in place have done significant harm to the U.S. chemical plastics industry. Washington and Beijing have levied billions of dollars in punitive tariffs on each others’ products. American products facing tariffs include a range of plastic products. China is one of the biggest export markets for U.S. chemicals and plastics. Beijing’s tariffs are hurting U.S. chemicals and plastics exports.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Chemicals Plastics industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #44, which places it at the top 17% 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 bright 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.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector and S&P 500
The Zacks Chemicals Plastics industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 0.2% over this period compared with the S&P 500’s rise of 16.1% and the broader sector’s increase of 13.2%.
One-Year Price Performance
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 8.7X, below the S&P 500’s 15.27X but above the sector’s 7.73X.
Over the past five years, the industry has traded as high as 10.4X, as low as 3.13X, with a median of 6.34X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Chemical Plastics Stocks to Keep a Close Eye on
Covestro AG: Germany-based Covestro makes and markets high-quality polymers for various industries worldwide. The company is likely to gain from a recovery in volumes across Europe and China. It is seeing higher volumes across polycarbonates and coatings adhesive specialty businesses in medical applications. Volume growth in polycarbonates is driven by higher demand for resins in pandemic-related safety products. The company is also expected to benefit from the recent rebound in automotive and construction end-use markets. Its cost-saving actions are also expected to lend support to its margins.
Covestro currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the company’s current-year earnings has been revised 760% upward over the last 30 days. The company has also seen its shares rally roughly 62% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rayonier Advanced Materials Inc: The Florida-based company operates as a global supplier of cellulose specialties products. It will benefit from the sustained focus on cost reduction and working capital management to offset pandemic-driven headwinds. The company also remains focused on driving cash flows and improving liquidity. Recovery across automotive, industrial and construction end-markets are also expected to provide support to its High Purity Cellulose business. Moreover, a rebound in housing activities, strength in the repair & remodel market, and higher lumber prices are likely to act as catalysts for its forest products business.
The company, carrying a Zacks Rank #2 (Buy), has an expected earnings growth of 60.7% for the current year. The consensus estimate for the current year has been revised 12.4% upward over the last 30 days. The stock has also shot up 309% over the past six months.
Westlake Chemical Corporation: Texas-based Westlake Chemical is a vertically integrated international producer and supplier of petrochemicals, polymers and building products. The company should benefit from higher demand in its polyethylene business in specialty applications, especially food packaging, and improving demand for PVC resin and construction-related downstream vinyl products. It will also gain from its investment in capacity expansion projects and actions to improve operating efficiency and reduce costs.
Westlake Chemical carries a Zacks Rank #3 (Hold). The company has delivered an earnings surprise of 292.9%, on average, over the trailing four quarters. The stock has also rallied roughly 83% over the past six months.
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