Industry players like Daqo New Energy Corp. DQ, Ingevity Corporation NGVT, AdvanSix Inc. ASIX and Hawkins, Inc. HWKN are banking on strategic measures, including operating cost reductions to tide over the 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, speciality 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?
Input Cost Pressure a Concern: Specialty chemical makers are facing headwinds from raw material cost inflation and supply chain 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 supply crunch was worsened by Hurricane Ida. Plant shutdowns associated with Ida further squeezed the supply of major raw materials and pushed up their prices. Russia's invasion of Ukraine has also exacerbated pressure on the already strained global supply chain. The lingering impacts of supply chain bottlenecks are expected to continue over the short haul and exert pressure on the margins of chemical specialty companies.
Demand Headwinds From Automotive 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. Lower automotive production is likely to impact volumes of specialty chemical companies over the near term.
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 #170, which places it at the bottom 33% 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 11.3% over this period compared with the S&P 500’s rise of 7.8% and the broader sector’s increase of 10.2%.
One-Year Price Performance
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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 9.11X, below the S&P 500’s 14.63X and above the sector’s 6.3X.
Over the past five years, the industry has traded as high as 39.99X, as low as 8.87X, with a median of 24.03X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
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Enterprise Value/EBITDA (EV/EBITDA) Ratio
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4 Chemical Specialty Stocks to Keep a Close Eye on
Daqo New Energy: China-based Daqo New Energy, sporting a Zacks Rank #1 (Strong Buy), is a leading producer of high-purity polysilicon. Higher polysilicon average selling prices driven by strong demand for solar energy products are expected to boost its sales and margins. DQ’s facilities are running with increased efficiency, which is likely to drive production volumes. The company’s efforts to improve its cost structure should also support to its margins. Its energy efficiency efforts and enhanced manufacturing efficiencies are contributing to lower costs. The company is expected to gain from lower production cost aided by improved operational efficiency in its newly-built Phase 4B facility.
Daqo New Energy has expected earnings growth of 81.3% for the current year. The Zacks Consensus Estimate for current-year earnings for DQ has been revised 24.5% upward over the last 60 days.
Price and Consensus: DQ
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AdvanSix: New Jersey-based AdvanSix is a manufacturer of nylon 6 resin, chemical intermediates and ammonium sulfate fertilizer. The company is expected to benefit from improved end-market conditions and growth of its differentiated products. ASIX is seeing a recovery in demand across a number of markets, including automotive, building & construction, electronics and packaging. Higher demand is expected to drive its volumes. Strong agricultural industry fundamentals also bode well.
AdvanSix, carrying a Zacks Rank #1, has expected earnings growth of 54.7% for the current year. The Zacks Consensus Estimate for current-year earnings for ASIX has been revised 35% upward over the last 60 days. The company beat the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 23.6%, on average.
Price and Consensus: ASIX
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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 a 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 drive long-term growth. It expects to bring additional alternative fatty acid capacity at its Crossett facility online in 2022, supporting more substantial future sales growth. The company is also looking to bring its new polyol capability at the DeRidder plant onstream this year.
Ingevity, carrying a Zacks Rank #2 (Buy), has expected earnings growth of 9.4% for the current year. The consensus estimate for earnings for the current year for NGVT has been revised 2% 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 15.8%.
Price and Consensus: NGVT
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Hawkins: Minnesota-based Hawkins is a leading specialty chemical and ingredients company that formulates, distributes, blends, and manufactures products for its customers. It is seeing strong growth in its Water Treatment unit, riding on strength across pools, resort and fitness center end markets. Acquisitions of ADC and C&L Aqua are also contributing to its performance. Higher demand for health and immunity products is driving its Health and Nutrition segment. HWKN’s Industrial segment is also benefiting from higher sales of agricultural, pharmaceutical and food ingredient products. The acquisition of NAPCO Chemical also expands its Water Treatment business.
Hawkins, carrying a Zacks Rank #2, has expected earnings growth of 22.3% for the current fiscal year. The consensus estimate for HWKN’s earnings for the current fiscal has been revised 0.4% upward over the last 60 days. It beat the Zacks Consensus Estimate for earnings in three of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 21.5%, on average.
Price and Consensus: HWKN
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DAQO New Energy Corp. (DQ): Free Stock Analysis Report
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AdvanSix (ASIX): Free Stock Analysis Report
Hawkins, Inc. (HWKN): Free Stock Analysis Report
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