Despite concerns about carbon emissions, the centrality of chemicals is still a fact. According to the International Energy Agency (IEA), the industry is now rebounding from pandemic lows driven by solid demand for substances like plastics and methanol.
The United States chemical industry is expected to experience a comeback in 2022, driven by the strong economic recovery and the easing of the pandemic restrictions. U.S. chemical volumes are expected to grow 3% in 2022, with chemical shipping increasing 8% in 2021 and 2022. Given this backdrop, we think fundamentally sound chemical stocks Linde plc (LIN) and Westlake Chemical Corporation (WLK) could be solid bets now.
However, supply chain worries and inflationary effects are taking a heavy toll on chemical firms. So, we think fundamentally bleak stocks Air Products and Chemicals, Inc. (APD) and Albemarle Corporation (ALB) are better avoided now.
Stocks to Buy:
Linde plc (LIN)
Based in the U.K., LIN is an industrial gas company that operates in North and South America, the Middle East, Africa, and the Asia-Pacific. Its offerings include oxygen, nitrogen, and other gases and serve healthcare, petroleum refining, chemical, and water treatment industries.
On October 21, LIN announced that it had opened a new hydrogen production facility in Texas, raising its total United States Gulf Coast hydrogen capacity. The plant has already begun to supply high-purity hydrogen under a long-term supply agreement. The initiative should add significantly to LIN’s revenue stream.
In September, the company announced its decision to increase production capacity by almost 50% in its air-separation plant in Mims, Florida. The expansion is expected to increase its industrial gas supply and cater to the growing demand.
For its fiscal third quarter, ended September 30, LIN’s sales increased 11.9% year-over-year to $7.67 billion. Its adjusted operating profit rose 19.5% from the prior-year quarter to $1.81 billion. And its adjusted income and adjusted EPS from continuing operations came in at $1.42 billion and $2.73, respectively, up 24.6% and 27% from the same period last year.
A $10.39 consensus EPS estimate for its next year (fiscal 2022) indicates a 10.6% year-over-year increase. And the $28.57 billion consensus revenue estimate for the coming year reflects a 6.2% improvement from the current year. The stock has gained 22.9% over the past year and 20.8% year-to-date.
LIN’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
LIN has a Momentum grade of A, and Stability, Sentiment, and Quality grades of B. In the 90-stock Chemicals industry, it is ranked #23. The industry is rated A.
Click here to see the additional POWR Ratings for LIN (Growth and Value).
Westlake Chemical Corporation (WLK)
WLK is a basic chemical, vinyl, polymers, and building products marketer worldwide, operating through the Vinyl segment, providing specialty and commodity polyvinyl chloride (PVC); and the Olefins segment, offering polyethylene and various co-ethylene products. WLK is headquartered in Houston, Tex.
On November 24, WLK agreed with an epoxy resin, modifier, and curing agent producer, Hexion Inc., to acquire its global epoxy business. With the acquisition, WLK is expected to expand its product portfolio to include coatings and composite products.
And on November 17, the company announced that its Vinnolit subsidiary in Germany launched a low-carbon alternative PVC, which has widely used applications in the construction, automotive, and medical sectors. The product launch is aligned with WLK’s long-term sustainability goals.
WLK’s net sales increased 61% year-over-year to $3.10 billion in its third fiscal quarter ended September 30. Its net income and EPS attributable to WLK improved 964.9% and 942.2%, respectively, from the same period last year to $607 million and $4.69. Its EBITDA rose 275.3% from the prior-year quarter to $1.08 billion.
Analysts expect WLK’s EPS to increase 397.7% year-over-year to $4.33 in the current quarter (ending December 2021). And the Street expects its revenue to rise 47.2% from the prior-year quarter to $2.89 billion in the current quarter. Also, WLK has an impressive surprise earnings history; it has topped consensus EPS estimates in each of the trailing four quarters. Over the past year, WLK’s shares have gained 15.9% in price, and9.3% year-to-date.
It’s no surprise that WLK has an overall A rating, which translates to Strong Buy in our POWR Rating system.
The stock has a B grade for Growth, Value, Sentiment, and Quality. It is ranked #8 in the Chemicals industry.
To see the additional POWR Ratings for Momentum and Stability for WLK, click here.
Stocks to Avoid:
Air Products and Chemicals, Inc. (APD)
APD is a worldwide provider of atmospheric gases such as oxygen and nitrogen, process and specialty gases such as hydrogen, helium, and carbon dioxide, equipment for air separation and hydrocarbon recovery, and services. APD is based in Allentown, Pa.
On October 27, APD completed its asset acquisition and project financing transactions for a $12 billion air separation unit/gasification/power joint venture (JV) with Aramco, ACWA Power, and Air Products Qudra in Jazan, Saudi Arabia. However, it should take some time for the company to realize gains from this venture.
For its fourth fiscal quarter, ended September 30, APD’s cost of sales increased 28.1% year-over-year to $2.01 billion. For its fiscal year ended September 30, its cash provided by financing activities decreased 143.3% from the prior year to a negative $1.42 billion. And its cash and cash items balance for the year came in at $4.47 billion, declining 14.9% year-over-year.
Analysts expect APD’s revenue to increase 6.8% year-over-year to $11.94 billion in the next year (fiscal 2023). However, APD has missed consensus EPS estimates in three out of the trailing four quarters. The stock has declined 4.4% in price over the past month.
APD has a Value grade of D. It is ranked #60 in the Chemicals industry.
Click here to see additional POWR Ratings for APD (Growth, Momentum, Stability, Sentiment, and Quality).
Albemarle Corporation (ALB)
Baton Rouge, La.-based ALB is a worldwide manufacturer of engineered specialty chemicals, which operates through Lithium; Bromine Specialties; and Catalysts segments. Its Lithium segment produces lithium compounds and lithium specialties to be used in a variety of goods.
On October 22, ALB declared its intent to make strategic investments in China. The company plans to expand its lithium conversion capacities by building two conversion plants. However, construction is expected to be completed in 2024. So, the investments are not likely to contribute to the company’s revenue stream until 2024.
In the third fiscal quarter, ended September 30, ALB’s gross profit decreased 1.9% year-over-year to $249.27 million. Its operating profit declined 8.9% from the prior-year quarter to $131.52 million. Its net income attributable to ALB and EPS came in at negative $392.78 million and negative $3.36, respectively, registering a 499.6% and 465.2% decrease from the same period last year.
The Street expects ALB’s EPS to decrease 16.2% year-year to $0.98 in the current quarter (ending December 2021). The stock has declined 1.6% in price over the past month.
This bleak outlook is reflected in ALB’s POWR Ratings. The stock has an overall D grade, which equates to Sell in our proprietary rating system.
ALB has a Value grade of F. It is ranked #82 in the Chemicals industry.
In addition to the POWR Rating grades we have stated above, one can see ALB ratings for Growth, Momentum, Stability, Sentiment, and Quality here.
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LIN shares rose $3.43 (+1.08%) in premarket trading Thursday. Year-to-date, LIN has gained 22.15%, versus a 21.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...
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