5 Chemical Stock Picks for 2H as Industrial Activity Rebounds

The chemical industry, which reeled under the effects of the bitter tariff war between the United States and China last year, received yet another heavy blow from the coronavirus pandemic.

Companies in this space faced the heat from a significant downturn in demand across certain major industries including construction and automotive during the first half in the wake of the deadly outbreak. The contagion brought global industrial activities to a shuddering halt, sapping demand for chemicals. In particular, disruptions due to coronavirus hurt industrial activities in China, a top consumer of chemicals.

Chemical makers also faced headwinds from short supply of raw materials as a result of the pandemic. The closure of a large number of factories across China to stem the spread of the virus disrupted the global supply chain and impaired logistics.

However, an economic rebound in China and a return of global economic activities are expected to usher in a better second half for the industry. The global economy is gradually pulling out of its coronavirus-induced slump as businesses reopen following lockdown restrictions.

Notably, economic activities in China are picking up pace as the country continues its gradual recovery from the fallout of the pandemic. After a contraction in the first quarter, China’s manufacturing activities picked up in the last three months on a recovery in domestic demand. China’s official manufacturing purchasing managers’ index clocked at 50.9 in June, up from 50.6 in May. A reading above 50 indicates expansion in activity.

Business activities in the construction sector also gathered momentum in June. China’s automotive sector has also rebounded from the crisis wrought by coronavirus as government stimulus helped revive consumer demand. Beijing’s stimulus measures are likely to rev up the world’s second-largest economy in the second half.

Lockdown measures are also gradually being lifted by governments across Europe and Asia in an effort to resuscitate their economies. Major economies in Eurozone are seeing a recovery with a rebound in industrial output following a slump in April as restrictions to blunt the spread of coronavirus eased.

Major parts of the United States have also reopened for business after coronavirus-led shutdowns. Notably, the U.S manufacturing sector is gaining momentum on a recovery in the overall economy. According to the Institute for Supply Management, the U.S Purchasing Managers’ Index registered 52.6% in June, rising from May’s reading of 43.1%. A figure above 50% indicates expansion. June saw growth in new orders, production and employment after declining in May. The rebound in manufacturing activities instills optimism as the sector is a major driver for the U.S. chemical industry.

Moreover, U.S. automakers started resuming production in May following a nearly two-month shutdown due to coronavirus. Automakers are ramping up production to normal levels in an effort to boost lagging vehicle inventories at dealerships. Resumption of several projects that were stalled earlier due to coronavirus-induced disruptions is also expected to support the revival in the U.S. construction sector. As these major markets recover, demand for chemicals is expected to go up moving ahead.

Meanwhile, chemical companies are benefiting from higher demand for chemicals and materials across industries like healthcare and packaging. With a surge in the number of coronavirus cases globally, demand for health, hygiene and safety products including PPE and disinfectants has grown by leaps and bounds. A number of companies are taking steps to crank up production to address the surging demand for these products. Some of them are even repurposing their production lines to make finished products including hand sanitizers.  

In a challenging environment, chemical makers also remain focused on self-help measures, including cost-cutting and productivity improvement, expansion into high-growth markets, operational efficiency improvement and actions to strengthen balance sheet and boost cash flows. Some of the companies also remain actively focused on acquisitions to diversify and drive growth. These actions are likely to reap margin benefits.

5 Stocks Worth a Bet

Chemical companies grappled with demand slowdown and supply chain disruptions due to coronavirus in the first half. However, a rebound in China, the resumption of economic activities around the world and a recovery across major end-use markets are likely to bring good tidings in the back half of the year. As such, it would be prudent to zero in on stocks in the space that have healthy prospects.

We highlight the following five stocks, with a solid Zacks rank, that are good options for investment right now.

Green Plains Inc. GPRE

The Nebraska-based company sports a Zacks Rank #1 (Strong Buy). It has expected earnings growth of 52% for the current year. The company also delivered a positive earnings surprise of 23.1%, on average, over the trailing four quarters. Moreover, its shares have surged around 139% over the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Rayonier Advanced Materials Inc. RYAM

This Florida-based company, carrying a Zacks Rank #1, has expected earnings growth of 51.9% for the current year. The Zacks Consensus Estimate for the current year has been revised 4.6% upward over the last 60 days. The company also has an expected long-term earnings per share growth rate of 37.7%. It has also seen its shares shoot up roughly 135% over the past three months.  

Air Products and Chemicals, Inc. APD

Pennsylvania-based Air Products currently carries a Zacks Rank #2 (Buy). It has expected earnings growth of 3.3% for the current fiscal year. The company also has an expected long-term earnings per share growth rate of 8.9%. The stock is also up roughly 23% over the past three months.

Koppers Holdings Inc. KOP

This Pennsylvania-based company, carrying a Zacks Rank #2, has delivered an average positive earnings surprise of 10.9% for the trailing four quarters. The Zacks Consensus Estimate for the current year has been revised 31.6% upward over the last 60 days. Moreover, its shares have shot up around 32% over the past three months.

Hawkins, Inc. HWKN

This Minnesota-based company carries a Zacks Rank #2. It has expected earnings growth of 12.8% for the current fiscal year. The consensus estimate for the current fiscal has been revised 3.1% upward over the last 60 days. The company has also seen its shares rally roughly 24% over the past three months.

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Air Products and Chemicals, Inc. (APD) : Free Stock Analysis Report
 
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