4 Chemical Specialty Stocks to Gain From Demand Recovery

Core Insights - The Zacks Chemicals Specialty industry is expected to benefit from a demand rebound as customer inventory destocking nears completion, which has affected the industry throughout 2023 [1][3]. Industry Overview - The Zacks Chemicals Specialty industry includes manufacturers of specialty chemical products used in various end-use markets such as textiles, automotive, electronics, and agriculture [2]. - Specialty chemicals are critical for the performance of finished products and can be single molecules or formulations, impacting a wide range of industries [2]. Demand Recovery - Improved demand is anticipated across major industries, particularly automotive and construction, driven by a recovery in automotive production and resolution of supply chain issues [3]. - The end of customer inventory destocking, primarily caused by high inflation and pandemic impacts, is expected to support volume growth for specialty chemical companies [3]. Self-Help Measures - Companies are implementing cost-cutting, productivity improvements, and operational efficiency measures to navigate ongoing challenges [4]. - Actions to strengthen balance sheets and boost cash flows are being aggressively pursued by industry participants [4]. Cost Pressures - Specialty chemical manufacturers are facing inflation in raw material costs and disruptions in supply chains and logistics, which continue to impact margins [5]. - Although raw material costs have moderated, they remain elevated compared to pre-pandemic levels, and inflationary pressures are expected to persist [5]. Industry Ranking and Performance - The Zacks Chemicals Specialty industry holds a Zacks Industry Rank of 68, placing it in the top 27% of over 250 Zacks industries, indicating positive near-term prospects [6]. - Over the past year, the industry has outperformed both the S&P 500 and the broader Zacks Basic Materials sector, gaining 25.6% compared to the S&P 500's 24.8% and the sector's 8.8% [8]. Current Valuation - The industry is currently trading at an EV/EBITDA ratio of 11.72X, which is below the S&P 500's 15.06X and the sector's 11.74X [9]. Notable Companies - Daqo New Energy: A leading producer of high-purity polysilicon, expected to benefit from strong demand for solar products and improved operational efficiency, with a Zacks Rank of 1 (Strong Buy) [10]. - American Vanguard: Focused on agricultural products, expected to rebound from previous challenges, with a Zacks Rank of 2 (Buy) and an expected earnings growth rate of 196.2% [12]. - PPG Industries: A global supplier of paints and coatings, benefiting from restructuring and cost-saving measures, with a Zacks Rank of 3 (Hold) and an expected earnings growth rate of 10.2% [15]. - Hawkins: A specialty chemical company seeing growth in its Water Treatment segment, with a Zacks Rank of 3 and an expected earnings growth of 26.2% [18].