Kevin McCarthy, Chemicals Analysis, Vertical Research Partners08.07.17
Chemicals
Earnings Preview: Outlook Constructive on Balance
• 2Q17 earnings should set up well for chemicals. On the heels of a quiet “warnings” period, we enter earnings season cautiously optimistic regarding the trajectory of future estimate revisions. Factors that should lend support to earnings include PMI strength in the US and China, price momentum among inorganic chemicals (TiO2, caustic soda, chlorine and lithium), a weaker USD, and, for specialty chemical producers, prospects for healthy volumes in 2Q followed by oil-linked raw material cost relief in 2H17. Key risk factors for the sector include elevated expectations, potential for deceleration of demand in auto OEM and, for petrochemical names, ongoing weakness in the outlook for ethylene/PE margins as US Gulf Coast producers experience a supply-driven cyclical downturn. Overall, we remain market weight on US chemicals with an ongoing preference for commodity and diversified chemical names. Our top picks overall are DOW, EMN, HUN and PPG.
• We are generally in line for 2Q and 2017, but more conservative looking into 2018. Figure 1 compares Vertical Research Partners’ earnings estimates to consensus. For the first time since our re-launch on 4 October 2016, when we were 6.3% below the Street on average for 2017, we find ourselves nearly in line with consensus 2017 estimates. For the most part...
• Pre-release activity has been quiet. On 19 June Olin guided lower for company-specific reasons. Specifically, Olin trimmed its 2Q EBITDA by $45mn due to outage-related costs at its vinyl chloride monomer (VCM) and Bisphenol-A (BPA) units in Freeport, Texas. On 28 June HB Fuller reported disappointing fiscal 2Q (May) results despite strong 4% organic volume growth as the company noted gross margin...
• We fine tune price targets to reflect new market highs. While our earnings estimates are unchanged, we adjust numerous price targets slightly higher as shown in Figure 2. Changes reflect the relative P/E and/or relative EV/EBITDA components of our valuation framework for each company against the backdrop of a rising stock market. The S&P500 index is now up 9.8% YTD and 4.7% over the past three months. For companies where we have revised our price target more recently, the magnitude of change may be more muted. Likewise, we employ a sum-of-the-parts-based valuation framework for certain companies (e.g. DOW, HUN), where we have updated our price targets recently based on fluctuations in the value of comparable companies and/or other inputs.
For more information click here.
Earnings Preview: Outlook Constructive on Balance
• 2Q17 earnings should set up well for chemicals. On the heels of a quiet “warnings” period, we enter earnings season cautiously optimistic regarding the trajectory of future estimate revisions. Factors that should lend support to earnings include PMI strength in the US and China, price momentum among inorganic chemicals (TiO2, caustic soda, chlorine and lithium), a weaker USD, and, for specialty chemical producers, prospects for healthy volumes in 2Q followed by oil-linked raw material cost relief in 2H17. Key risk factors for the sector include elevated expectations, potential for deceleration of demand in auto OEM and, for petrochemical names, ongoing weakness in the outlook for ethylene/PE margins as US Gulf Coast producers experience a supply-driven cyclical downturn. Overall, we remain market weight on US chemicals with an ongoing preference for commodity and diversified chemical names. Our top picks overall are DOW, EMN, HUN and PPG.
• We are generally in line for 2Q and 2017, but more conservative looking into 2018. Figure 1 compares Vertical Research Partners’ earnings estimates to consensus. For the first time since our re-launch on 4 October 2016, when we were 6.3% below the Street on average for 2017, we find ourselves nearly in line with consensus 2017 estimates. For the most part...
• Pre-release activity has been quiet. On 19 June Olin guided lower for company-specific reasons. Specifically, Olin trimmed its 2Q EBITDA by $45mn due to outage-related costs at its vinyl chloride monomer (VCM) and Bisphenol-A (BPA) units in Freeport, Texas. On 28 June HB Fuller reported disappointing fiscal 2Q (May) results despite strong 4% organic volume growth as the company noted gross margin...
• We fine tune price targets to reflect new market highs. While our earnings estimates are unchanged, we adjust numerous price targets slightly higher as shown in Figure 2. Changes reflect the relative P/E and/or relative EV/EBITDA components of our valuation framework for each company against the backdrop of a rising stock market. The S&P500 index is now up 9.8% YTD and 4.7% over the past three months. For companies where we have revised our price target more recently, the magnitude of change may be more muted. Likewise, we employ a sum-of-the-parts-based valuation framework for certain companies (e.g. DOW, HUN), where we have updated our price targets recently based on fluctuations in the value of comparable companies and/or other inputs.
For more information click here.
