4 Chemical Stocks Poised To Outshine Q2 Earnings Estimates

The chemical industry is riding on an upturn in the global economy and strength across major end-use markets such as construction and automotive. Improving fundamentals in the energy space driven by an upswing in crude oil prices also augur well for the industry.

The U.S. Chemical Industry bounced back from the havoc wreaked by last year’s hurricanes, and is poised for a smooth run this year. The American Chemistry Council (ACC), a leading industry trade group,envisions national chemical production (excluding pharmaceuticals) to rise 3.4% in 2018. Growth has come from a pickup in U.S. manufacturing, higher demand across light vehicles, housing markets, capital investments and strengthening export markets.

Chemical makers are seeing strong demand from the construction and automotive sectors. A rebound in crude oil prices has also led to a recovery in demand for chemicals in the energy market and a favorable pricing environment for chemical products as their prices essentially move in tandem with oil prices.

The Zacks Industry Rank of 63 carried by the Zacks Chemicals Diversified industry bears testimony to the fact that the chemical industry is in fine shape. The favorable rank places the industry in the top 25% of the 250 plus Zacks industries. Our back testing shows that the top 50% of the Zacks ranked industries outperforms the bottom half by a factor of more than two to one.

Despite some headwinds, including a spike in raw materials costs as a result of short supply and softness in agricultural commodity prices due to persistent grain glut, chemical companies are likely to continue the Q1 earnings momentum this time around as the fundamental driving factors remain in place.

Cost-cutting measures and productivity improvement actions by chemical companies should continue to reap industry-wide margin improvements in Q2. Moreover, a number of chemical makers are taking appropriate pricing actions (reflected by hikes in chemical prices), to offset raw material cost inflation, which should also provide margin benefits.

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