The U.S. specialty chemical industry faced the heat from a significant downturn in demand for much of the first half in the wake of the coronavirus pandemic. Shutdowns and travel restrictions to blunt the spread of infection paralyzed industrial and economic activities, leading to a slump in demand for specialty chemicals across major end-use markets including automotive and construction. Notably, lockdowns and restrictions brought economic activities in the United States to a near-standstill in March and April.
However, the American specialty chemical industry is on the path to recovery from the virus-led slowdown on a pick-up in demand in key markets. Demand started to recover in the third quarter with a rebound in business activities from the coronavirus-induced slowdown as major parts of the nation reopened following the loosening of restrictions.
Notably, the U.S manufacturing sector is gaining strength on a recovery in the overall economy. The sector kept the momentum going in September although activities rose at a slightly slower pace than that of August. According to the Institute for Supply Management, the U.S. Manufacturing Purchasing Managers’ Index clocked 55.4% in September compared with 56% in August. The September figure indicates an expansion in the overall economy for the fifth straight month following a contraction in April. New orders also grew for the fourth month in a row in September.
Manufacturing activity is a key indicator for chemical demand. Thus, the rebound in manufacturing activity augurs well for the U.S. specialty chemical industry.
The U.S. automotive sector is also recuperating following the virus-led slump on the back of a strong rebound in customer demand for new vehicles, especially trucks and sport utility vehicles, partly supported by low auto loan interest rates. The recovery of the domestic automotive industry gained momentum in the third quarter. U.S. auto sales have rebounded after hitting a pandemic-induced low in April. Cheap borrowing costs, rising consumer confidence and increasing preference for private transportation due to health, safety and social distancing concerns have contributed to a pick-up in auto sales.
Major U.S. automakers are currently ramping up production in an effort to boost lagging vehicle inventories at dealerships amid surging demand. Plants of these producers are currently running near their full capacity in a bid to re-stock showrooms for the holiday season.
Moreover, the U.S. housing sector has staged a solid recovery with new home sales hitting a 14-year high in August. The sector’s rebound has been backed by record-low mortgage rates and higher demand for new properties due to the rising trend of working from home amid the pandemic.
As these major markets recover, demand for specialty chemicals is expected to go up through the balance of 2020. Improving housing market and higher automotive production are expected to drive demand for paints and coatings.
Meanwhile, specialty chemical makers remain focused on self-help measures, including cost-cutting and productivity improvement, expansion into high-growth markets, operational efficiency improvement, restructuring and actions to strengthen balance sheet and boost cash flows. These actions are likely to help these companies to sail through these tough times.
Favorable Industry Rank
The Zacks Chemicals Specialty industry currently carries a Zacks Industry Rank #50, which places it at the top 20% of more than 250 Zacks industries. 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.
5 Stocks Worth Betting On
A revival in demand across major end-markets represents a tailwind for the U.S. specialty chemical industry. The rebound in industrial and manufacturing activities and continued recovery in the U.S. economy bode well for the industry. As such, it would be prudent to zero in on stocks in the space that have compelling prospects.
We highlight the following five stocks, with a solid Zacks rank, that are good options for investment right now. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ashland Global Holdings Inc. ASH
Kentucky-based Ashland, sporting a Zacks Rank #1, is a leading specialty chemicals company serving a vast range of consumer and industrial markets. The company’s restructuring actions have provided it with a diverse business portfolio focused on high-quality markets and better positioned it for future growth. The company's actions to reduce operating costs should also support its margins. Moreover, Ashland remains committed to boost its free cash flows through a number of initiatives including reduction in capital spending and net working capital.
The Zacks Consensus Estimate for current-year earnings for Ashland has been revised 45.2% upward over the last 60 days. The company also has an expected long-term earnings per share growth rate of 10.7%. Its shares are also up around 35% over the past six months.
Axalta Coating Systems Ltd. AXTA
Pennsylvania-based Axalta, carrying a Zacks Rank #1, is a global coatings company engaged in manufacturing, marketing and distribution of coatings systems. The company will benefit from cost savings through the implementation of its global restructuring initiative (including streamlining of workforce) and other cost-reduction actions in response to the pandemic. Improving global traffic volumes are also likely to aid its refinish business. Moreover, the recovery in global automotive production augurs well for the company’s transportation coatings business.
The consensus estimate for current-year earnings has been revised 2.4% upward over the last 60 days. The company’s shares are also up around 44% over the past six months.
Valvoline Inc. VVV
Kentucky-based Valvoline, carrying a Zacks Rank #2, is a producer and distributor of automotive, commercial and industrial lubricants as well as automotive chemicals. Improving miles driven trends following the easing of pandemic-related restrictions are expected to drive its top line. The company should also benefit from its cost-reduction program, strategic acquisitions and investment in the expansion of its Quick Lubes network.
The consensus estimate for the current year has been revised 0.7% 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 19.2%. It also has an expected long-term earnings per share growth rate of 5%. The company’s shares are also up around 41% over the past six months.
Quaker Chemical Corporation KWR
Pennsylvania-based Quaker Chemical, carrying a Zacks Rank #2, makes and markets a range of formulated specialty chemical products for various heavy industrial and manufacturing applications. The company's combination with Houghton International, Inc and the acquisition of the operating divisions of Norman Hay plc are expected to drive its top line. It is also expected to benefit from cost savings actions, integration synergies, improvement in product margins and healthy cash flows amid the challenging environment.
The Zacks Consensus Estimate for the current year has been revised 1.3% 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 33.8%. Moreover, its shares have shot up around 46% over the past six months.
Element Solutions Inc ESI
Based in Florida, Element Solutions is a leading specialty chemicals provider offering innovative and differentiated solutions to its customers across a vast spectrum of industries. The company, currently carrying a Zacks Rank #2, is expected to gain from healthy demand in its high-end electronics business and the strong rebound in the automotive industry. It is also implementing a number of cost-containment measures including reduction of traveling costs. These actions are likely to lend support to its margins in 2020.
The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 21.9%. The stock is also up roughly 41% over the past six months.
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