The Zacks Chemicals Diversified industry is mired in demand headwinds in certain markets, including consumer durables and building & construction. Lower consumer spending due to inflationary pressures in Europe and a slow recovery in China are impacting demand.
Industry players like Air Products and Chemicals, Inc. APD, DuPont de Nemours, Inc. DD and Eastman Chemical Company EMN are banking on strategic measures, including operating cost reductions and aggressive price hikes, to tide over the challenging environment.
About the Industry
The Zacks Chemicals Diversified industry consists of manufacturers of basic chemicals, plastics, specialty chemicals and agricultural chemicals. Companies in this space serve a host of end markets, such as automotive, building & construction, transportation, electronics, aerospace and agriculture. Basic chemicals are produced in large quantities and include petrochemicals and intermediates (such as ethylene, propylene and benzene), polymers (including plastic resins such as polyethylene, polypropylene and polyvinyl chloride), and inorganic chemicals (such as chlorine, caustic soda and titanium dioxide). Specialty chemicals that include catalysts, specialty polymers and coating additives are used in specific fields based on their performance. Agricultural chemicals include herbicides, fungicides and insecticides that are used to protect crops from disease, pests and weeds.
What's Shaping the Future of the Chemicals Diversified Industry?
Demand Headwinds From End-market Softness: Companies in the chemical-diversified space remain challenged by demand weakness in certain key markets. The sluggishness in the building & construction, and consumer electronics markets are the key concerns. In North America, uncertainties surrounding the U.S. housing market are weighing on building & construction. Elevated borrowing costs and inflation have taken a bite out of the residential construction industry. The consumer electronics market, a key driver of demand for specialty chemicals and advanced materials, is among the hardest hit. Following the post-pandemic boom, global electronics demand has cooled amid high inflation, elevated interest rates and cautious consumer behavior. Manufacturing activities have also softened amid weaker demand for goods and higher borrowing costs, while recovery remains tepid. Demand for chemicals in the industrial sector has weakened due to constrained industrial production. Softer demand in industrial and consumer durables is hurting chemical volumes.
Slowdown in Europe and China a Concern: In China, a slower recovery in economic activities is hurting chemical demand. China is seeing slower economic growth and a sluggish real estate market. A weak property market and a slowdown in infrastructure investments have led to softer demand. The real estate sector has taken a hard hit amid a decline in new home prices, property investment and housing sales. The slowdown in Europe, resulting from the war in Ukraine and weaker consumer spending due to high levels of inflation and high interest rates, has also led to softer demand in that region. Energy and feedstock inflation has reduced industrial production and consumer spending in Europe. The ongoing weakness in these key regions will likely impact the demand for chemicals over the short haul.
Strategic Actions to Aid Results: The companies in this space are taking a host of strategic measures, including cost-cutting and productivity improvement, operational efficiency improvement and actions to strengthen the balance sheet and boost cash flows. In particular, the industry participants are aggressively implementing actions to lower costs. The industry participants are also raising selling prices to counter cost inflation. Such moves are likely to help the industry sustain margins amid the prevailing challenges.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Chemicals Diversified industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #206, which places it at the bottom 17% 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 outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector & S&P 500
The Zacks Chemicals Diversified 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 15.7% over this period compared with the S&P 500’s rise of 10.4% and the broader sector’s decline of 4.8%.
One-Year Price Performance
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 9.9X, below the S&P 500’s 17.05X and the sector’s 12.11X.
Over the past five years, the industry has traded as high as 12.86X, as low as 5.57X and at the median of 9.47X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Chemicals Diversified Stocks to Keep a Close Eye on
Air Products: Based in Pennsylvania, Air Products is a leading industrial gases company. The company is benefiting from investments in high-return projects, new business deals, acquisitions and productivity initiatives. It remains committed to its gasification strategy and is executing its growth projects. These projects are expected to be accretive to earnings and cash flows.
Air Products is also boosting productivity to improve its cost structure. It is seeing the positive impacts of its productivity actions. Benefits from additional productivity and cost improvement programs are likely to support its margins. APD has also been benefiting from favorable pricing.
Air Products, a Zacks Rank #3 (Hold) stock, has expected earnings growth of 2.1% for the fiscal 2025. APD beat the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 3.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: APD
DuPont: Delaware-based DuPont provides technology-based materials and solutions to markets including electronics, transportation, construction and water. DuPont is expected to gain from its productivity and pricing actions. It continues to implement strategic price increases to offset cost inflation. These actions are likely to support its margins. DD also remains focused on driving growth through innovation and new product development. Its innovation-driven investment focuses on several high-growth areas. It remains committed to driving returns from its R&D investment.
DuPont, carrying a Zacks Rank #3, has a projected earnings growth rate of around 7.6% for 2025. DD also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 16.1%.
Price and Consensus: DD
Eastman Chemical: Tennessee-based Eastman Chemical is a specialty materials company offering a broad range of products, including polymers, performance films, specialty plastics, high-value additives, plasticizers and fibers, in attractive end markets. It is gaining from its innovation-driven growth model, operational execution and cost-management actions. The company remains focused on increasing new business revenues by utilizing its innovation-driven growth strategy. Pricing initiatives are also expected to support the company’s bottom line. EMN is also expected to benefit from lower operating costs from its operational transformation program. It remains focused on maintaining a disciplined approach to capital allocation.
Eastman Chemical, carrying a Zacks Rank #3, has expected earnings growth of 7.4% for 2025. EMN beat the Zacks Consensus Estimate in each of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 11.7%.
Price and Consensus: EMN
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