5 Chemical Stocks Worth a Bet Before Their Q4 Earnings

The chemical industry is riding high on an upswing in the global economy and continued strength across major end-use markets such as construction, automotive and electronics. Another positive for the industry is a recovery in demand in the energy space – a key chemical end-market that had been out of favor for a spell. The recovery has been driven by the rebound in crude oil prices from their historic lows.

Notwithstanding a few headwinds including some lingering impacts of devastating hurricanes, chemical companies are expected to continue the earnings momentum witnessed in the third quarter into the December quarter as the fundamental driving factors remain firmly in place.

Strategic measures including productivity improvement, pricing actions, portfolio restructuring and earnings-accretive acquisitions are expected to continue to drive the performance of chemical makers in the fourth quarter.

Per the Zacks Industry classification, the chemical industry is grouped under the broader Basic Materials sector. The Basic Materials sector is among the Zacks sectors that are expected to rack up the strongest gains in the fourth quarter. Overall fourth-quarter earnings for the sector are projected to climb 26.9% while revenues are expected to spike 17.7%, per the latest Earnings Preview.

The chemical industry has also outperformed the broader market in the December quarter. The industry has gained around 7.6% over this period, higher than S&P 500’s corresponding return of roughly 6.4%.

Strategic Actions to Yield Margin Benefits

Cost-cutting measures and productivity improvement actions by chemical companies should continue to reap industry-wide margin improvements in the fourth quarter. Chemical companies also remain actively focused on mergers and acquisitions to diversify and perk up growth. Synergies from acquisitions should also lend support to earnings in the December quarter.  

Moreover, a number of chemical makers are taking appropriate pricing actions (reflected by hikes in chemical prices in the recent past) in the wake of a sharp rise in raw materials costs. This is also expected to support their margins in the fourth quarter.

Demand Strength Across Key End-Markets

Chemical makers continue to see strong demand from construction and automotive sectors – major chemical end-use markets. A recovery across housing and commercial construction markets has been a tailwind for the chemical industry. The underlying trends in the housing space remain healthy, backed by steady buyer demand, low mortgage rates, high homebuilders’ confidence, low unemployment levels and rising rent costs.

The automotive sector also continues its good run amid certain challenges, supported by an improving job market, rising personal income, improved consumer confidence, low fuel prices, impressive vehicle launches and attractive financing options.

A rebound in crude oil prices has also led to a recovery in demand for chemicals in the energy space, an important end-use market. The recent uptrend in oil prices has been supported by a decline in U.S. oil stockpiles and extension of oil production cuts by OPEC and other major world producers until the end of 2018. Crude oil prices recently hit levels not seen since December 2014.

Improving fundamentals in the energy space is supporting chemical demand in this major market. The rebound in oil prices has also led to a favorable pricing environment for chemical products.

A Few Concerns

The lingering effects of Hurricane Harvey pose a concern for U.S. chemical companies in the fourth quarter. Harvey weighed on U.S. chemical production during the third quarter, knocking off a sizable chunk of production capacity. In particular, a significantly portion of total U.S. ethylene production capacity was hit by the storm. A number of major chemical producers had to shutter or cut back ethylene production, leading to reduced supply of this major chemical in the third quarter.

The carry-over impacts of disruptions caused by Harvey (in the form of lost production volumes and costs related to the storm) may pose some earnings headwinds for U.S. chemical makers in the final quarter of 2017.

Moreover, a number of chemical companies are witnessing a spike in raw material prices, exacerbated by short supply due to hurricanes. Some of these companies, in their third-quarter earnings call, had warned of continued headwinds from elevated input costs through the December quarter. As such, raw material cost inflation may unfavorably impact margins of these companies.   

Picking the Winning Stocks

While the chemical industry still remains hamstrung by a few challenges, the industry’s momentum is expected to continue in the fourth quarter on continued strength across major end-markets. Amid such a backdrop, a sneak peek at the space for some potential winners backed by a solid Zacks Rank could be a great idea for investors looking to gain from the fourth-quarter earnings season.

With the help of the Zacks Stock Screener, we have shortlisted chemical stocks that have an estimated year over year EPS growth of 5% or more for the to-be-reported quarter. Further, these stocks carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

5 Stocks to Scoop Up

Below we discuss five chemical stocks that are worth investing in before the fourth-quarter earnings season hits full throttle.

Kronos Worldwide, Inc. KRO    
     
Dallas, TX-based Kronos sports a Zacks Rank #1. The company has an expected EPS growth of 206.3% for the fourth quarter. It delivered average positive earnings surprise of 58.8% over the trailing four quarters. The stock also has an expected long-term earnings growth of 5%. Moreover, the stock has gained around 112% over a year.

Huntsman Corporation HUN

Texas-based Huntsman is another attractive choice with a Zacks Rank #1. The company has an expected EPS growth of 113.3% for the fourth quarter. It also delivered positive earnings surprise in each of the trailing four quarters with an average beat of 32.7%. Moreover, the stock has an expected long-term earnings growth of 8%. The stock has also gained around 71% over a year.

Methanex Corporation MEOH

Our next pick in the space is Vancouver, Canada-based Methanex armed with a Zacks Rank #1. The stock has an estimated EPS growth of 158.7% for the fourth quarter. Moreover, it delivered average positive earnings surprise of 50.1% over the trailing four quarters. Earnings estimate for the fourth quarter has also increased 8.2% over the past month. The stock has also gained roughly 32% over a year.

BASF SE BASFY    
     
Germany-based BASF sports Zacks Rank #2. The company has an expected EPS growth of 61.9% for the fourth quarter. It delivered average positive earnings surprise of 5.5% over the trailing four quarters. The stock also has an expected long-term earnings growth of 8.7%.

Univar Inc. UNVR

Illinois-based Univar carries a Zacks Rank #2. The company has an expected EPS growth of 7.4% for the fourth quarter. It also delivered average positive earnings surprise of 21.9% over the trailing four quarters. Moreover, the stock has an expected long-term earnings growth of 12.2%.

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BASF SE (BASFY) : Free Stock Analysis Report
 
Methanex Corporation (MEOH) : Free Stock Analysis Report
 
Kronos Worldwide Inc (KRO) : Free Stock Analysis Report
 
Huntsman Corporation (HUN) : Free Stock Analysis Report
 
Univar Inc. (UNVR) : Free Stock Analysis Report
 
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