4 Chemical Stocks Poised To Outshine Q3 Earnings Estimates

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Chemical companies’ third-quarter results are expected to reflect healthy demand across major end-use industries and the benefits of self-help actions to counter continued headwinds from higher raw material, energy, and logistics costs. The chemical industry is still recovering from the havoc wreaked by the coronavirus, taking succor from an upturn in demand across major end-use industries such as automotive, building & construction, and electronics. The demand recovery has been backed by an uptick in global manufacturing and industrial activities.

The companies in this space that have reported September-quarter results have delivered a decent earnings performance on the back of healthy end-market demand, notwithstanding the continued headwinds from supply-chain challenges and input and energy cost inflation. A number of chemical companies are yet to report their quarterly numbers, including Albemarle Corporation (ALB - Free Report), Livent Corporation (LTHM - Free Report), Koppers Holdings Inc. (KOP - Free Report), and Huntsman Corporation (HUN - Free Report).
 

How Have Things Shaped Up for These Companies?

Chemical companies are likely to have benefited from strong demand and higher price realization in the third quarter. Demand for both commodity and specialty chemicals has been healthy in key end-use markets.
 
Demand from the automotive market continues to hold up well, despite the semiconductor shortage, which is still affecting automotive builds globally. Moreover, demand in construction, packaging, and healthcare remains strong. Strength is being witnessed in residential construction globally.

The companies in this space are also seeing a recovery in demand across the aerospace and energy markets. A recovery in drilling activities on the back of a spike in oil prices has led to an uptick in demand in the energy space. Healthy end-market demand is expected to have boosted sales volumes and the top line of chemical companies.

However, chemical companies are expected to have faced margin pressure, resulting from raw material cost inflation as well as supply-chain and freight transportation disruptions. Supply-chain disruptions have led to a spike in raw material costs. The Russia-Ukraine conflict and new lockdowns in China following a resurgence in COVID-19 infections have put more pressure on the already-strained global supply chain and affected chemical demand.

Higher energy and gas prices have also pushed up the production costs of chemicals. Higher costs in Europe driven by the war-led supply-chain snafus are likely to have been a headwind in the third quarter. The impacts of these headwinds are likely to reflect on the chemical companies’ performance in the September quarter.

Against this backdrop, chemical makers remain focused on strategic actions, 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.

A number of companies in this space have also been taking price increase actions to counter cost inflation and tightness in the supply chain. Chemical companies have been actively focused on acquisitions to diversify and drive growth. The benefits of these actions might reflect in their results.
 

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 witness a decline in earnings on a year-over-year basis in the third quarter. Overall earnings for the sector are projected to decline 18.4% on 4.3% higher revenues, per the latest Earnings Trends report.
 

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 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%.
 

Our Choices

Below, we list four chemical stocks that have the right combination of elements to pull off an earnings surprise this time around:
 

Albemarle Corporation (ALB)

Albemarle has an Earnings ESP of +3.64% and carries a Zacks Rank #1. The company is scheduled to report on Nov 2.

Albemarle surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 24.2%. The Zacks Consensus Estimate for third-quarter earnings is pegged at $6.84, indicating a rise of 551.4% from the prior-year quarter. ALB is likely to have benefited from higher volumes in its lithium business on a recovery in global economic activities. Higher lithium prices are also likely to have supported its performance.

Tight supply conditions and growing demand for electric vehicles (EVs) are driving lithium prices. The company’s bromine business is also expected to have gained from strong demand and favorable pricing led by tight market conditions. Its cost-saving and productivity initiatives are also expected to have supported margins.

Albemarle Corporation Price and EPS Surprise

Albemarle Corporation Price and EPS Surprise

Albemarle Corporation price-eps-surprise | Albemarle Corporation Quote
 

Livent Corporation (LTHM)

Livent has an Earnings ESP of +7.93% and a Zacks Rank #2. It is scheduled to report on Nov 1. 

Livent surpassed the Zacks Consensus Estimate in three of the trailing four quarters while missing once. The company has a trailing-four-quarter earnings surprise of roughly 15.7%, on average. The consensus estimate for third-quarter earnings is pegged at 41 cents, which suggests an increase of 1,266.7% from the prior-year quarter. LTHM is expected to have benefited from strong demand and higher lithium pricing, aided by strong market conditions.

Lithium demand is expected to have been driven by higher EV sales and battery installations for EVs. Higher realized pricing is expected to have driven the company’s top line and margins. Tight supply-demand conditions are likely to have supported prices in the quarter.

Livent Corporation Price and EPS Surprise

Livent Corporation Price and EPS Surprise

Livent Corporation price-eps-surprise | Livent Corporation Quote
 

Koppers Holdings Inc. (KOP)

Koppers has an Earnings ESP of +2.28% and carries a Zacks Rank #2. It is scheduled to report on Nov 4.

Koppers surpassed the Zacks Consensus Estimate in two of the trailing four quarters while missing twice. The company has a trailing four-quarter negative earnings surprise of roughly 3.1%, on average. The Zacks Consensus Estimate for third-quarter earnings stands at $1.17, which indicates a rise of 15.8% from the prior-year quarter. The company is likely to have gained from higher prices across its businesses. KOP is expected to have witnessed strong demand and prices in the Utility and Industrial Products business and favorable demand in its Carbon Materials and Chemicals unit in the third quarter.

Koppers Holdings Inc. Price and EPS Surprise

Koppers Holdings Inc. Price and EPS Surprise

Koppers Holdings Inc. price-eps-surprise | Koppers Holdings Inc. Quote
 

Huntsman Corporation (HUN)

Huntsman has an Earnings ESP of +3.59% and a Zacks Rank #3. It is slated to report on Nov 4.

Huntsman surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 14.5%. The Zacks Consensus Estimate for third-quarter earnings stands at 72 cents. HUN is likely to have benefited from improved pricing and its cost-control action. Higher average selling prices are expected to have driven sales across its segments. The CVC Thermoset and Gabriel Performance Products acquisitions are also likely to have supported its margins.

Huntsman Corporation Price and EPS Surprise

Huntsman Corporation Price and EPS Surprise

Huntsman Corporation price-eps-surprise | Huntsman Corporation Quote


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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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