4 Chemical Stocks Set to Pull Off a Beat This Earnings Season
Strong end-market demand and benefits of self-help actions are likely to reflect on the Q3 performance of Westlake (WLK), Tronox (TROX) and Chemours (CC) and Albemarle (ALB).
Chemical companies’ third-quarter results are expected to reflect the upturn in demand across major end-use industries from the coronavirus lows. The chemical industry faced the heat from a significant downturn in demand during the first half of 2020 as lockdowns and travel restrictions amid the pandemic brought global economic activities to a near-standstill.
However, with the reopening of the major economies around the world, demand for chemicals started to pick up from the third quarter last year on a rebound in economic activities worldwide. The recovery continued to gain steam this year on an upswing in global industrial activities.
Chemical companies are seeing a strong rebound in demand in key end-use markets including automotive, construction and electronics. Strong demand in automotive and construction, the two major chemical-consuming markets, is likely to have driven their volumes and top lines in the third quarter.
The automotive industry has witnessed a speedy recovery after the virus-led slump on the back of strong pent-up demand. Despite the semiconductor crunch, chemical makers are enjoying healthy demand from the automotive market.
The construction sector has also recovered on the restart of projects that were stalled earlier partly due to supply chain disruptions. Strength is being witnessed in residential construction globally, supported by lower interest rates and higher demand for new properties due to the rising trend of work from home. Companies in the chemical space are also expected to have benefited, in the third quarter, from higher demand for chemicals and materials across healthcare and packaging markets, thanks to coronavirus.
However, chemical companies’ third-quarter results are expected to reflect the impacts of raw material cost inflation as well as higher supply chain and logistics costs. Supply chain disruptions due to coronavirus and weather-related events have led to a spike in raw material costs. Supply tightness continues for a number of key raw materials, including several resins, natural gas, propylene, butadiene and glass fiber. The lingering impacts of supply chain and logistic bottlenecks, exacerbated by the recent unfavorable weather events globally and the resurgence of coronavirus infections, are expected to be reflected in the September quarter.
Hurricane Ida dealt another blow to the supply chain. Force majeures and plant shutdowns associated with Ida are expected to have further squeezed the supply of raw materials including ethylene and propylene and pushed up their prices, the impacts of which are likely to reflect on chemical companies’ third-quarter results.
Against this backdrop, chemical makers remain focused on self-help measures, including cost-cutting and productivity improvement, expansion into high-growth markets, restructuring, operational efficiency improvement, and actions to strengthen balance sheets and boost cash flows. A number of companies in this space have also been taking price increase actions to counter the cost inflation and tightness in the supply chain. Chemical companies also remain actively focused on acquisitions to diversify and drive growth. The benefits of these actions might reflect on their third-quarter results.
Among the chemical companies that have already come up with their quarterly numbers, we have seen solid earnings beats from prominent names such as Dow Inc. DOW and Celanese Corporation CE on the back of a demand strength in end-markets amid headwinds from supply-chain disruptions.
Expectations for Q3
The chemical industry is housed within the broader Zacks Basic Materials sector. Basic Materials is among the sectors that are expected to deliver positive earnings growth in the third quarter. Overall earnings for the sector are projected to rise 138% on 36.7% higher revenues, per the latest Earnings Trends.
How to Pick Winners?
Given the large number of players operating in the chemical space, picking the right stocks is apparently not an easy task. But our proprietary methodology makes it fairly simple. 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. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.
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 delivering 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 four chemical stocks that have the right combination of elements to pull off positive surprises this earnings season:
Westlake Chemical Corporation WLK has an Earnings ESP of +1.22% and a Zacks Rank #1. It is slated to report third-quarter results on Nov 2.
The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 21.1%. The Zacks Consensus Estimate for third-quarter earnings has been revised 1.6% upward over the last 60 days. The consensus estimate for third-quarter earnings is pegged at $3.91, which suggests a rise of 551.7% from the prior-year quarter. Westlake Chemical is likely to have benefited from higher demand in its polyethylene business in specialty applications, especially food packaging, and strength in global demand for PVC resin. Demand in the downstream building products business is expected to have remained strong in the quarter on new housing starts and spending on repair and remodeling activities.
Westlake Chemical Corporation Price and EPS Surprise
Tronox Holdings plc TROX has an Earnings ESP of +0.38% and a Zacks Rank #1. It is scheduled to report third-quarter results on Oct 27. You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus mark for third-quarter earnings has been stable over the last 60 days. The Zacks Consensus Estimate for third-quarter earnings is pegged at 67 cents, which suggests a rise of a whopping 1,240% from the prior-year quarter. The company is likely to have benefited from price improvements in the third quarter, which is expected to have offset the volume weakness in TiO2 due to supplier and logistics constraints. Higher TiO2 and zircon prices are expected to have supported its margins.
Tronox Holdings PLC Price and EPS Surprise
The Chemours Company CC has an Earnings ESP of +5.70% and carries a Zacks Rank #2. The company is scheduled to report third-quarter results on Nov 4.
The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 38.9%. The Zacks Consensus Estimate for third-quarter earnings has been stable over the last 60 days. The consensus estimate for third-quarter earnings is pegged at 97 cents, which suggests a rise of 106.4% from the prior-year quarter. The company is likely to have benefited from higher demand for Opteon, strong execution and cost-cutting measures. It is expected to have witnessed continued strong demand for Opteon in mobile and stationary applications in the third quarter. Productivity and operational improvement actions across its businesses are also likely to have supported margins.
The Chemours Company Price and EPS Surprise
Albemarle Corporation ALB has an Earnings ESP of +8.73% and carries a Zacks Rank #3. The company is scheduled to report third-quarter results on Nov 3.
The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 22%. The Zacks Consensus Estimate for third-quarter earnings has been revised 2.7% upward over the last 60 days. The consensus estimate for third-quarter earnings is pegged at 75 cents. The company is likely to have benefited from higher lithium volumes on continued recovery in global economic activities, improved performance in its Catalysts unit and its cost-reduction actions in the quarter. Higher lithium prices are also expected to have aided its performance. Healthy customer orders and plant productivity improvements are like to have supported lithium volumes.
Albemarle Corporation Price and EPS Surprise
Zacks Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
You know this company from its past glory days, but few would expect that it's poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks' Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.Free: See Our Top Stock and 4 Runners Up >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Westlake Chemical Corporation (WLK): Free Stock Analysis Report
Dow Inc. (DOW): Free Stock Analysis Report
Albemarle Corporation (ALB): Free Stock Analysis Report
Celanese Corporation (CE): Free Stock Analysis Report
Tronox Holdings PLC (TROX): Free Stock Analysis Report
The Chemours Company (CC): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research