In this article I use AAII’s A+ Investor Stock Grades to provide insight into three chemical stocks. With chemical companies facing significant supply chain disruptions and increased costs since 2021, should you consider the stocks of Celanese (CE), Eastman Chemical (EMN) and PPG Industries (PPG)?
Chemical Stocks Recent News
With expectation of a modest market rebound going into 2023, chemical producers looked forward to potential growth within their communities. However, by mid-2023, it was apparent that sluggish demand for chemicals was persisting globally. A depressed global economy and inflation in the U.S. left no room for a rebound in 2023. Chemical output grew less than 1% year over year in the first eight months of 2023, which caused several chemical producers to focus on reducing costs and improving processes to help offset the reduction in output.
The American Chemistry Council expects that capital spending for the U.S. chemical industry will remain mostly unchanged in 2024 before gaining momentum with a growth rate of 3% to 4% in 2025 and 2026, respectively. However, the question of where the companies will be allocating this capital could determine their position in the industry.
The energy transition toward renewable sources holds promise for the chemical industry. For instance, oil and gas companies are getting into chemicals, minerals mining and agriculture to further a clean energy supply chain. This provides chemical companies with more opportunities but also puts them in competition with oil and gas and other industries that have strong cash flows.
On the regulation front, the U.S. Environmental Protection Agency (EPA) recently finalized a rule to improve the process of conducting risk evaluations on chemicals under the Toxic Substances Control Act (TSCA). According to the EPA, these improvements will ensure TSCA risk evaluations account for the risks associated with a chemical. They will also provide a stable foundation to protect public health, including employees and communities, from the risk of toxic chemicals.
Grading Chemical Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been indicated by research and real-world investment results to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three chemical stocks—Celanese, Eastman Chemical and PPG Industries—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Chemical Stocks
What the A+ Stock Grades Reveal
Celanese (CE) is a global chemical and specialty materials company. It is a producer of engineered polymers that are used in a variety of applications. The company’s segments include engineered materials, acetate tow and acetyl chain. The engineered materials segment develops, produces and supplies a range of specialty polymers for automotive and medical applications as well as industrial products and consumer electronics. The acetate tow segment is a global producer and supplier of acetate tow and acetate flake, primarily used in filtration application. The acetyl chain segment includes the integrated chain of intermediate chemistry, emulsion polymers, ethylene-vinyl acetate polymers and redispersal powders businesses. The company is also engaged in the mobility and materials business. Its products include polyoxymethylene, ultra-high molecular weight polyethylene, polybutylene terephthalate and long-fiber reinforced thermoplastics.
The company has a Value Grade of C, based on its Value Score of 52, which is average. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda).
The company has a rank of 36 for shareholder yield, 20 for the price-earnings ratio and 48 for the price-to-sales ratio. The company has a shareholder yield of 1.3%, a price-earnings ratio of 9.0 and a price-to-sales ratio of 1.62. The company has a price-to-free-cash-flow ratio of 17.4, which translates to a rank of 49.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. Celanese has an Earnings Estimate Revisions Grade of D, based on a score of 25, which is negative. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Celanese reported a negative earnings surprise for first-quarter 2024 of –2.9%, and in the prior quarter reported a positive earnings surprise of 7.6%. Over the last month, the consensus earnings estimate for the first quarter of 2024 has remained around the same level, moving from $1.914 to $1.913 per share based on five downward and four upward revisions. Over the last three months, the consensus earnings estimate for full-year 2024 has also remained flat, moving from $11.379 to $11.343 per share based on four downward and six upward revisions.
Celanese has a Quality Grade of B, with a score of 61, which is strong. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
Celanese ranks strongly in terms of its return on assets and Z-Score. The company has a return on assets of 7.5% and a Z-Score of 6.23. The company’s gross income to assets and change in total liabilities to assets are below the sector median.
Eastman Chemical Co. (EMN) is a global specialty materials company that produces a range of products. Its segments include additives and functional products, advanced materials, chemical intermediates and fibers. The additives and functional products segment manufactures materials for products in the transportation; personal care and wellness; food, feed and agriculture; building and construction; water treatment and energy; consumables; and durables and electronics markets. The advanced materials segment produces and markets polymers, films and plastics with differentiated performance properties for value-added end uses in transportation; durables and electronics; building and construction; medical and pharma; and consumables markets. The chemical intermediates segment sells and markets solvents and plasticizers to the industrial chemicals and processing, building and construction, health and wellness and agrochemicals markets. The fibers segment manufactures and sells acetate tow and triacetin plasticizers for use in filtration media.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades from 1998 through 2019.
Eastman Chemical has a Quality Grade of A, with a score of 87, which is very strong. The company ranks strongly in terms of its buyback yield, Z-Score and return on assets. Eastman Chemical has a buyback yield of 1.3%, a Z-Score of 7.05 and a return on assets of 6.3%. The sector median buyback yield and Z-Score are –0.4% and 6.13, respectively. However, Eastman Chemical ranks poorly in terms of its accruals to assets and gross income to assets, in the 37th and 33rd percentiles, respectively.
Eastman Chemical has a Momentum Grade of B, based on its Momentum Score of 74, which is strong. This means that it is strong in terms of its weighted relative strength over the last four quarters. The ranks are 82, 57, 54 and 54, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 3.6%, which translates to a rank of 74. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%.
The company has a Value Grade of B, based on its Value Score of 63, which is good value. This is derived from a price-to-book ratio of 2.13 and an enterprise-value-to-Ebitda ratio of 10.9, which rank in the 58th and 51st percentiles, respectively. Eastman Chemical has a Growth Grade of C, based on a score of 46, which is average. The company has had positive annual cash from operations for each of the last five years but a poor five-year annual sales growth rate.
PPG Industries (PPG) manufactures and distributes a range of paints, coatings and specialty materials. The company operates through two segments: performance coatings and industrial coatings. The performance coatings segment primarily supplies a range of protective and decorative coatings, sealants and finishes, pavement marking products, paint strippers, stains and related chemicals, as well as transparencies and transparent armor. The industrial coatings segment primarily supplies a range of protective and decorative coatings and finishes along with adhesives, sealants, metal pretreatment products, optical monomers and coatings, low-friction coatings, precipitated silicas and other specialty materials. Its performance coatings brands include PPG, Glidden, Comex, Olympic, Dulux, Sigma, Histor, Seigneurie, Peintures Gauthier and Johnstone’s, among others. Its industrial coatings brands include PPG and Teslin. It supplies its products to customers in an array of end uses.
PPG Industries has a Quality Grade of A, with a score of 96, which is very strong. The company ranks strongly in terms of its return on assets, Z-Score and F-Score. PPG Industries has a return of assets of 6.4%, a Z-Score of 8.58 and an F-Score of 8.
PPG Industries has a Momentum Grade of D, based on its Momentum Score of 39, which is weak. This means that it is weak in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative price strength is –6.5%.
PPG Industries reported earnings in line with expectations for first-quarter 2024, and in the prior quarter reported a positive earnings surprise of 2.2%. Over the last month, the consensus earnings estimate for the second quarter of 2024 has decreased from $2.549 to $2.496 per share due to 15 downward revisions. Over the last month, the consensus earnings estimate for full-year 2024 has remained at a relatively stable level, changing slightly from $8.482 to $8.445 per share, based on 11 downward revisions.
The company has a Value Grade of D, based on its Value Score of 33, which is expensive. This is derived from a high price-to-free-cash-flow ratio of 32.7, a high enterprise-value-to-Ebitda ratio of 13.4 and a price-to-book ratio of 3.98, which rank in the 72nd, 62nd and 77th percentiles, respectively. PPG Industries has a Growth Grade of B, based on a score of 63, which is strong. The company has had positive annual cash from operations for each of the last five years, while sales have increased in only three of the last five years.
____
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
If you want an edge throughout this market volatility, become an AAII member.
Read the full article here
