The global commodity market is currently on a roll. While basic materials stocks were largely overlooked for much of last year due to global economic weakness, they have rebounded sharply in recent months. Notably, an expected inflationary environment in the United States and the rapid recovery of global industrial activities have been major drivers in pushing commodity prices higher, particularly basic materials.
The basic materials sector includes a wide variety of companies that develop raw materials for other industries, such as manufacturing and mining of chemicals, plastics, construction resources, paper, forest products, packaging products, metals and other minerals. The resumption of industrial operations has been pushing the demand for basic materials to pre-pandemic levels and investors are trading to profit from the flourishing markets. This is evident in the Invesco DWA Basic Materials Momentum ETF’s (PYZ) 29.7% returns so far this year compared to S&P 500 Trust ETF’s (SPY) 12.2% gains over the period.
Rising commodity prices directly influence the profit margins of basic materials companies. Hence, we think betting on relatively overlooked basic materials stocks Tredegar Corporation (TG), CRH Plc (CRH), LyondellBasell Industries (LYB), and Vedanta Limited (VEDL) could be a great way to survive any stock market decline that rising inflation might cause.
Tredegar Corporation (TG)
Virginia-based TG is an industrial manufacturer with three primary businesses–custom aluminum extrusions for the North American building and construction, automotive and specialty markets, surface protection films for high technology applications in the global electronics industry, and specialized polyester films primarily for the Latin American flexible packaging market.
On March 4, TG’s custom-fabricated and finished aluminum extrusions manufacturing subsidiary, Bonnell Aluminum, expanded the operations of its TSLOTS line of aluminum structural framing systems into the Midwest region of the United States.
TG generated $184.8 million in the first quarter of 2021, driven by robust demand for its aluminum extrusions business from building and construction, automotive, and specialty markets. Its Bonnell Aluminum segment contributed nearly 64% to its overall top-line. The segment’s net sales were relatively flat year-over-year despite a 6.2% decline in sales volume, due to the pass-through of higher metal costs and an increase in average selling prices. However, its Flexible Packaging Films segment came in strong with sales and volumes rising more than 6% year-over-year. The company reported $0.27 in EPS, a significant improvement from the year-ago $0.67 per share loss.
Bonnell’s current bookings and backlog are at record high levels, and the company is taking proactive measures to overcome a shortage in manufacturing personnel to meet production needs and customer demand. In fact, TG’s management expects to spend $21 million in capital expenditures for Bonnell this year, including $3 million for infrastructure upgrades at its facilities, and $4 million for strategic projects. Shares of TG have gained 7.05% over the past month to close yesterday’s trade at $15.65.
TG’s POWR Ratings reflect this promising outlook. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. TG has a B grade for Value, Momentum and Quality. It is ranked #11 of 45 stocks in the A-rated Industrial – Manufacturing industry.
In total, we rate TG on eight different levels. To see additional POWR Ratings for Growth, Stability and Sentiment click here.
CRH Plc (CRH)
Dublin-based CRH manufactures and distributes building materials. The company supplies aggregates, asphalt, ready-mixed concrete, cement, paving and other construction services across Europe, the Americas and internationally. CRH operates in three segments–Americas Materials, Europe Materials, and Building Products.
CRH has been on an expansion spree of late. It spent $405 million to complete 17 acquisitions in 2020, with the most significant acquisition being Barriere Construction, a vertically integrated asphalt and paving operation in Southern Louisiana, for a total consideration of approximately $120 million last December. On the divestment front, the company completed 12 transactions and realized total business and asset disposal proceeds of approximately $307million.
For the full-year 2020, CRH reported $27.6 billion in revenue, declining 2% year-over-year, due primarily to project delays owing to the pandemic. The cement business delivered operating profit growth for the year, driven primarily by strong price realization, performance improvement initiatives and cost saving measures. Its sales volumes in its U.S. operations were 2% ahead of the prior year. In fact, cement consumption in Southeast Brazil increased during the year enabling CRH to achieve volume growth, resulting in operating profit improvements. However, its EPS came in at $1.42, compared to the $2.13 year-ago value.
CRH has spent approximately $200 million on four acquisitions so far this year, the largest of which was a building products pipe and precast concrete business, which expanded the company’s infrastructure products footprint in the Midwest of the US. Management has a strong acquisition pipeline and believes that the company is well positioned to capitalize on growth opportunities for future value creation. CRH has surged 60.5% over the past year and may gain further momentum. Wall Street analysts expect CRH’s EPS to rise at an average rate of 6.6% per annum over the next five years.
It’s no surprise that CRH has an overall B rating, which equates to Buy in our proprietary rating system. CRH has a B grade for Momentum, Stability and Sentiment. The stock is currently ranked #21 in the 52-stock, A-rated Industrial – Building Materials industry.
Beyond what we’ve stated above, we have also given CRH grades for Growth, Value and Quality. Get all CRH’s ratings here.
LyondellBasell Industries (LYB)
LYB is one of the largest plastics, chemicals and refining companies in the world. It produces olefins, co-products like polyolefins, high density polyethylene, low density polyethylene, and linear low-density polyethylene and polypropylene (PP) products. LYB sells products into more than 100 countries and is the world’s largest producer of polypropylene compounds. It is also the world’s largest global licensor of polyolefin technologies.
On May 26, LYB and two other leading plastics and material science companies, Dow and NOVA Chemicals, established the Closed Loop Circular Plastics Fund to invest in scalable recycling technologies, equipment upgrades and infrastructure solutions. Also, the company recently licensed its high-pressure polyethylene technology, Lupotech T, to China-based Shandong Yulong Petrochemical for use in its production lines.
In the first quarter of 2021, GFI’s revenue climbed 21.2% year-over-year to $9.08 billion on strong consumer-driven demand, a recovery in the durable goods markets, and increased prices owing to industry supply constraints. In fact, the company expects strong domestic polyethylene demand in the coming months as U.S. producers seek to fulfill domestic order backlogs, rebuild inventories and serve export demand. Its EPS for the quarter came in at $3.18, surging more than 650% from its $0.42 year-ago value.
LYB has returned 78.9% over the past year to close yesterday’s trade at $116.87. The company recently commenced the commercial production of polymers using raw material derived from plastic waste at its Germany site. Furthermore, LYB has expanded its mechanical recycling manufacturing capacity in Europe through its Quality Circular Polymers joint venture with SUEZ and commercialized polyethylene and polypropylene products made with renewable bio-based feedstocks. As such, analysts expect LYB’s revenue and EPS for the current quarter to grow 87.3% and 546.5%, respectively.
LYB’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. LYB has a B grade for Growth, Value and Sentiment. In the 99-stock, A-rated Chemicals industry, it is ranked #29.
Click here to access additional POWR Ratings for LYB (Stability, Quality and Momentum).
Vedanta Limited (VEDL)
VEDL is a subsidiary of India-based diversified natural resources company, Vedanta Resources PLC. VEDL is one of the world’s leading oil & gas and metals companies, with significant operations in oil & gas, zinc, lead, silver, copper, iron ore, steel, glass substrates, and aluminum & power across India, South Africa, Namibia, South Korea, Taiwan, UAE and Australia.
In April, VEDL launched Project Pratham with the goal of making VEDL a fully digitally driven company with a focus on significantly improving volume and cost reduction and improving the ease of doing business. As such, VEDL has been innovating its core manufacturing processes, ranging from optimization of polymer consumption in enhanced oil recovery (EOR), to optimizing throughput and metal recovery in zinc mills and smelters, to combustion optimization in power plants.
In its fiscal full-year ended March 31, 2021, VEDL reported a top-line of $11.72 billion, increasing 4% year-over-over at constant currency, due mainly to higher volume at its Zinc India aluminum business, its Iron ore & steel business and higher realized commodity prices. Zinc India witnessed record ore production of 15.5 million tons despite pandemic disruptions, culminating in its highest ever mined metal production of 972kt, up 6% year-over-over. VEDL also reported its highest ever aluminum production of 1,969kt during the year. Notably, its EPS for the year came in at $0.42, compared to a year-ago loss.
Shares of VEDL have surged nearly 71.3% so far this year to close yesterday’s trading session at $15.04. VEDL’s key business delivered record operational performance last year while maintaining its cost and volumes trajectory. But apart from implementing structural integration and adopting new technology, the company is partnering with Micro, Small and Medium enterprises (MSMEs) to set up downstream and ancillary manufacturing units near its plants.
VEDL’s POWR Ratings reflect this robust outlook. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. The stock has an A grade for Sentiment, and a grade of B for Growth and Quality. It is ranked #2 of 51 stocks in the Miners – Diversified industry.
To see additional POWR Ratings of VEDL for Value, Momentum and Stability click here.
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TG shares were trading at $15.70 per share on Wednesday morning, up $0.05 (+0.32%). Year-to-date, TG has declined -5.37%, versus a 12.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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