“We believe there is a long-term opportunity in higher quality specialty chemical stocks,” the research firm said.
Chemical companies certainly aren’t the sexiest part of the stock market.
And over the past year, specialty chemicals stocks have underperformed the broad stock market, points out Dave SekeraSenior US Market Strategist at Morningstar.
As cyclical companies, their sales and profits are closely tied to the economy, he explains. “And the weakening economic outlook has affected the valuations of these stocks,” Sekera said.
But there is a positive side. “While a stagnant or slowing economy will put pressure on earnings for these companies in the short term, we believe there is long-term opportunity in higher-quality specialty chemical stocks that are tied to several long-term themes.” said.
These include:
- car electrification,
- The growing demand for semiconductors,
- Transition to plastics,
- freshwater scarcity,
- Demand for healthier, natural and improved prepared foods.
“We believe undervalued specialty chemical stocks that are tied to these growth themes have significant upside potential,” Sekera said.
He listed six of them, in alphabetical order:
- celanese (EC) – Get a free report
- dupont (DD) – Get a free report
- eastman chemistry (REM) – Get a free report
- ecological laboratory (ECL) – Get a free report
- Ingredient (INPUT) – Get a free report
- International Flavors and Fragrances (IFF) – Get a free report
DuPont: Morningstar analyst Seth Goldstein assigns the company a narrow moat (durable competitive advantage) and puts the fair value of the shares at $95. It recently traded at $73.10.
“DuPont remains well positioned for long-term earnings growth,” he wrote in a comment. The industrial and electronics sectors should show higher demand for semiconductors, Goldstein said.
That and the increasing adoption of Internet of Things technologies “should result in an average annual growth rate of EBITDA (earnings before interest, depreciation and amortization) in the high single digits after 2023,” it said. “We forecast a similar growth rate in water and protection.”
Eastman Chemist: Goldstein gives the company a narrow moat and puts the fair value of the shares at $130. It recently traded at $84.75.
“We agree with the market’s near-term skepticism about Eastman’s earnings growth,” he wrote in a comment. “We forecast that higher prices and lower raw material costs will be largely offset by lower volumes.”
But on the bright side, “after an economic slowdown in 2023, we expect Eastman to be well positioned to deliver strong results, driven by volume growth for its specialty chemicals,” Goldstein said.
“A lot of the bad news is priced in, leaving long-term investors with a good shot.”
International flavors and fragrances: Goldstein gives the company a wide moat and puts the fair value of the shares at $140. It recently traded at $94.45.
“The market is concerned that cost inflation will continue to hurt earnings and is skeptical of management’s long-term growth strategy,” he wrote in a comment.
“We see little long-term impact from cost inflation. During previous times of cost inflation, IFF’s short-term earnings were affected by inflation, but there was no impact on long-term growth.”
So, “as cost inflation stabilizes in 2023, we expect IFF earnings to pick up starting in 2024,” Goldstein said.
The author of this story owns shares in Celanese and DuPont.
