Kickstart Your Portfolio With These Three Chemical Stocks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three chemical stocks. With chemical companies facing significant supply chain disruptions since 2020, should you consider the stocks of Celanese Corp. (CE), Eastman Chemical Co. (EMN) and PPG Industries Inc. (PPG)?
Chemical Stocks Recent News
After a rocky few years with supply chain disruptions, chemical companies look to rebound heading into 2023. Fifty-five percent of chemical manufacturers reported that port-related delays and congestion have worsened since the third quarter of 2021.
The industry has been expanding to digital customer experience, using mobile devices for interaction, deploying predictive analytics for information and enabling cloud architectures for computation. This allowed the industry to migrate to a virtual setting through the pandemic. Producers may increasingly use digital technologies to empower material innovation and expedite low-cost formulations by evaluating, optimizing and assimilating ingredient recipes and domain knowledge.
For the past 100 years, the industry’s business model has been to sell ever greater volumes of the energy-intensive, carbon-based products that essentially define it to this day. That business model cannot survive in the long term in a world that is struggling to achieve net-zero carbon emissions in the next 30 years. About 70 global chemical companies have net-zero or carbon-neutral targets set for 2050, which will require considerable and immediate work.
The industry could see increases in volume from increased federal infrastructure spending. In November 2021, the bipartisan infrastructure bill consisting of $1.2 trillion in investments across a variety of industries, was signed into law. Additionally, demand could be driven primarily by continued strength in repair and remodel activity and solid recovery in automotive demand in the near term.
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 auto and truck manufacturing 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 Corp. (CE) is a global chemical and specialty materials company. The company 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 (EVA) polymers and redispersible powders (RDP) businesses. The company is also engaged in the mobility and materials (M&M) business. Its products include polyoxymethylene, ultra-high molecular weight polyethylene, polybutylene terephthalate and long-fiber reinforced thermoplastics (LFT).
The company has a Value Grade of A, based on its Value Score of 85, which is considered to be deep value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade.
Celanese’s Value Score ranking is based on several traditional valuation metrics. The company has a rank of 16 for shareholder yield, 22 for the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) and 11 for the price-earnings ratio (with the higher the rank being better for value). The company has a shareholder yield of 4.9%, an enterprise-value-to-EBITDA-ratio of 5.2 and a price-earnings ratio of 5.1. The company has a price-to-sales (P/S) ratio of 1.05, which translates to a rank of 34.
The Value Grade is based on the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow (P/FCF) ratio and price-to-book-value ratio (P/B). The rank is scaled to assign higher scores to stocks with the most attractive valuations and lower scores to stocks with the least attractive valuations.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Celanese has an Earnings Estimate Revisions Grade of C, which is neutral. 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 second-quarter 2022 of –0.9%, and in the prior quarter reported a positive earnings surprise of 9.4%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has decreased from $3.129 to $2.188 per share due to 14 downward revisions. Over the last three months, the consensus earnings estimate for full-year 2022 has decreased 6.3% from $17.698 to $16.580 per share due to 15 downward revisions.
Celanese has a Quality Grade of B with a score of 71. The company ranks strongly in terms of its return on assets (ROA) and Z double prime bankruptcy risk (Z) score. The company has a return on assets of 11.3% and a Z-Score of 9.11. The industry average return on assets is 3.1%, well below Celanese. The company ranks below the industry median for accruals to assets, return on invested capital (ROIC), change in total liabilities to assets and gross income to assets.
Eastman Chemical Co. (EMN) is a global specialty materials company that produces a range of products. Eastman Chemical’s segments include additives and functional products (AFP), advanced materials (AM), chemical intermediates (CI) and fibers. The AFP 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 AM 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 CI 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 over the period from 1998 through 2019.
Eastman Chemical has a Quality Grade of A with a score of 86. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets, return on invested capital, gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z-Score and F-Score. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. 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.
The company ranks strongly in terms of its buyback yield, change in total liabilities to assets and return on assets. Eastman Chemical has a buyback yield of 10.6%, a change in total liabilities to assets of –3.6% and a return on assets of 7.6%. The sector median buyback yield and change in total liabilities to assets are –0.4% and 2.0%, respectively. However, Eastman Chemical ranks poorly in terms of its accruals to assets and gross income to assets, in the 23rd and 38th percentile, respectively.
Eastman Chemical has a Momentum Grade of C, based on its Momentum Score of 47. This means that it is average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 13.4% in the fourth-most recent quarter, offset by a below-average relative price strength of –9.9% in the most recent quarter, –4.5% in the second-most-recent quarter and –8.6% in the third-most-recent quarter. The scores are 39, 32, 50 and 91 sequentially from the most recent quarter. The weighted four-quarter relative price strength is –3.9%, which translates to a score of 47. 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 weighting of 20%.
The company has a Value Grade of B, based on its Value Score of 67, which is in the good value range. This is derived from a very high shareholder yield of 14.3% and a price-to-earnings (P/E) ratio of 8.9, which rank in the third and 26th percentile, respectively. Eastman Chemical has a Growth Grade of B based on a score of 65. The company has had strong annual cash from operations over the last five years but poor five-year annual sales growth.
PPG Industries Inc. (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 along with 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 90. The company ranks strongly in terms of its buyback yield, Z-Score and F-Score. PPG Industries has a buyback yield of 1.0%, a Z-Score of 8.20 and an F-Score of 7.
PPG Industries has a Momentum Grade of C, based on its Momentum Score of 49. This means that it is average in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative price strength is –3.3%.
PPG Industries reported a positive earnings surprise for third-quarter 2022 of 0.9%, and in the prior quarter reported a positive earnings surprise of 4.3%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has decreased from $1.491 to $1.138 per share due to 16 downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has decreased 7.1% from $6.448 to $5.988 per share, based on 20 downward revisions.
The company has a Value Grade of D, based on its Value Score of 34, which is expensive. This is derived from a very high price-earnings ratio of 26.2, a high enterprise-value-to-EBITDA ratio of 14.6 and a price-to-book ratio of 4.54, which rank in the 72nd, 69th and 85th percentile, respectively. PPG Industries has a Growth Grade of B based on a score of 65. The company has had strong annual cash from operations over the last five years.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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