4 Chemical Stocks Poised to Outshine Q2 Earnings Estimates

How Have Things Shaped Up for Chemical Stocks?

Companies in the chemical space are expected to have benefited from an uptick in demand in certain major markets. The chemical industry bore the brunt of a demand slowdown and continued customer inventory de-stocking last year. The downturn in the key building & construction and consumer electronics markets played spoilsport. In North America, uncertainties surrounding the U.S. housing market have weighed on building & construction. Elevated borrowing costs and inflation took a bite out of the residential construction industry. 

The consumer electronics market, a key driver of demand for specialty chemicals and advanced materials, was among the hardest hit. Global electronics demand cooled amid high inflation, elevated interest rates and cautious consumer behavior. 

The automotive sector represents a crucial end market for chemical manufacturers. A decline in global vehicle production last year weighed on demand from this segment. Elevated interest rates, coupled with economic slowdown concerns and tariff-related uncertainties, further pressured the market. The automotive industry is expected to rebound this year, supported by accelerating electric vehicle adoption as governments worldwide advance carbon-neutral initiatives. Better affordability, robust demand for hybrid models and aggressive promotional incentives are expected to lift new vehicle sales. As production picks up, the recovery momentum is likely to strengthen through the year. 

Chemical companies are also seeing signs of a recovery in demand across the construction and electronics markets. Demand in healthcare and packaging markets also remains steady. On a further positive note, customer inventory destocking in building & construction and consumer durables has largely ended, leading to low inventory levels. This is expected to have led to an uptick in chemical demand and volumes.  

Also, the benefits of strategic actions, including those to raise the selling prices of chemical products, cost-cutting and productivity improvement, operational efficiency enhancement, strategic acquisitions and actions to strengthen the balance sheet and boost cash flows, are expected to reflect on the performance of companies in this space in the June quarter.   

Partly offsetting these tailwinds, chemical makers are likely to have faced challenges from raw-material and energy-cost inflation and supply-chain and freight-transportation disruptions. Tariffs have led to increased costs for raw materials, resulting in higher production expenses for the industry players. Moreover, the Middle East conflict and the blockade of the Strait of Hormuz have led to significant supply disruptions and feedstock cost pressure. The impacts of inflationary pressures are expected to have reflected on the margins of chemical companies in the second quarter.

Expectations for Q2

The chemical industry is housed within the broader Zacks Basic Materials sector.  Basic Materials is among the Zacks sectors that are expected to see double-digit growth in earnings for the second quarter. Overall earnings for the space are projected to increase 44.4% on 14.9% higher revenues, per the latest Earnings Trends.

How to Pick Winners?

Given the large number of players operating in the chemical space, picking the right stocks is apparently not an easy task. But our proprietary methodology makes it fairly simple. One can trim the list with the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Zacks Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.

Earnings ESP — the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate — is our proprietary methodology for determining stocks that have high chances of delivering earnings surprises in their next announcements. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as much as 70%.

Our Choices

Below, we list four chemical stocks that have the right combination of elements to pull off an earnings surprise this time around:

Chemours has an Earnings ESP of +27.17% and sports a Zacks Rank #1. The company is scheduled to report on Aug. 4.

Chemours has a trailing four-quarter earnings surprise of roughly 69.8%, on average. The Zacks Consensus Estimate for second-quarter earnings stands at 43 cents. CC is expected to have benefited from seasonal volume strength in the quarter to be reported, driving top-line growth. Benefits from proactive cost-reduction and productivity initiatives aimed at supporting margin expansion are expected to reflect on its performance. Continued transition to Opteon Refrigerants and automotive Freon Refrigerant sales in North America are likely to have supported volume growth in the Thermal & Specialized Solutions segment.  

Methanex has an Earnings ESP of +0.06% and carries a Zacks Rank #2. It is slated to report on July 28. You can see the complete list of today’s Zacks #1 Rank stocks here.

Methanex missed the Zacks Consensus Estimate in three of the trailing four quarters and beat once. The company has a trailing four-quarter negative earnings surprise of roughly 27.7%, on average. The Zacks Consensus Estimate for second-quarter earnings stands at 4 cents. MEOH is expected to have seen strong operating performance across its global production network, supported by improved natural gas availability in key regions and reliable contributions from newly acquired assets. Its production is likely to have been supported by additional output from Beaumont and Natgasoline, added from OCI’s methanol business acquisition. Higher realized methanol prices, aided by the supply disruptions stemming from the Middle East conflict, are also expected to have driven its top line and margins. 

Avient has an Earnings ESP of +0.87% and carries a Zacks Rank #2. The company is scheduled to report on Aug. 6.

Avient surpassed the Zacks Consensus Estimate in each of the trailing four quarters at an average of 2.1%. The Zacks Consensus Estimate for earnings is pegged at 89 cents. AVNT is likely to have gained from the strength in sustainable solutions, cost-reduction actions and new business wins. Its mix toward defense, healthcare, telecom and chip packaging continues to support margins despite uneven volumes. Price/mix and productivity are expected to have contributed to margin expansion. Growth in healthcare and stable packaging are likely to have supported results.

DuPont has an Earnings ESP of +0.25% and carries a Zacks Rank #3. It is slated to report on Aug. 4. 

DuPont surpassed the Zacks Consensus Estimate in each of the trailing four quarters. The company has a trailing four-quarter earnings surprise of roughly 8%, on average. The Zacks Consensus Estimate for second-quarter earnings stands at $1.76. DD’s second-quarter results are likely to have been supported by its innovation-driven investment, productivity actions and the contributions of acquisitions. Continued strength in healthcare and aerospace end markets is expected to have aided its performance. The benefits of its structural cost actions and strategic price increases are expected to reflect on its performance. DD continues to implement strategic price increases in the wake of raw material and energy cost inflation. 

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