The chemical industry is growing due to increased demand from key sectors like automotive, construction, agriculture, healthcare, and electronics, especially in emerging markets. The industry is offering lucrative investment opportunities driven by heightened demand, government initiatives, and technological advancements in critical end-use industries.

However, for reasons discussed throughout this article, I believe Albemarle Corp. (ALB) should be best avoided at the moment, while it could be prudent to keep an eye on L'Air Liquide S.A. ADR (AIQUY) for an attractive entry point. On the other hand, it could be wise to buy NewMarket Corp (NEU) to capitalize on the industry tailwinds.

Before diving deeper into their fundamentals, let’s discuss what’s shaping the chemical industry’s prospects.

After the post-pandemic rebound, the chemical industry found itself under pressure last year due to a rise in energy and feedstock costs, pricing pressure, a smaller-than-expected rebound in China, and reduced profit margins.

This year, the chemical industry anticipates growth in demand for chemicals supporting the energy transition, driven by positive economic effects. Innovations in environmentally friendly products, coupled with data analytics and AI adoption, are providing a competitive edge to chemical companies.

Government policies post-pandemic, such as the Infrastructure Investment and Jobs Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, have allocated substantial funds and incentives to key sectors vital for the energy transition, including EV, semiconductors, and lithium-ion batteries.

These initiatives will boost the demand for chemicals and materials as they will be crucial to support the energy transition. As a result, the global chemical market is anticipated to grow at a CAGR of 8.8% until 2032.

Moreover, there is a substantial demand for specialty chemicals as they are designed for specific and niche applications. Driven by the demand to enhance product strength, durability, and efficiency, as well as the ability to create new applications, the specialty chemicals market is projected to grow at a CAGR of 7% until 2027. This growth will be propelled by increased demand in the agrochemical sector, recycled plastics, and construction chemicals.

Furthermore, digital technology is reshaping the strategic landscape for chemical manufacturers, enabling the use of various tools to innovate materials and streamline cost-effective formulations through the assessment, optimization, and integration of ingredient recipes and domain knowledge.

Considering these conducive trends, let’s analyze the fundamentals of the three Chemicals stocks, beginning with the third from the investment point of view.

Stock #3: Albemarle Corp. (ALB)

ALB develops, manufactures, and markets engineered specialty chemicals worldwide. It operates through three segments: Lithium, Bromine, and Catalysts.

In terms of the trailing-12-month asset turnover ratio, ALB’s 0.60x is 14% lower than the 0.70x industry average.

ALB’s net sales for the third quarter ended September 30, 2023, came in at $2.31 billion. The company’s adjusted net income attributable to ALB decreased 63.5% year-over-year to $322.59 million. Its adjusted EPS came in at $2.74, representing a decrease of 63.5% year-over-year. In addition, its adjusted EBITDA declined 61.9% year-over-year to $453.29 million.

Analysts expect ALB’s EPS and revenue for the quarter ended December 31, 2023, to decrease 84.3% and 11.7% year-over-year to $1.35 and $2.31 billion, respectively. Over the past nine months, ALB’s stock has declined 33.6% to close the last trading session at $146.89.

ALB’s grim outlook is reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an F grade for Growth and Sentiment and a D for Momentum and Stability. Within the Chemicals industry, it is ranked #72 out of 84 stocks. To see ALB’s ratings for Value and Quality, click here.

Stock #2: L'Air Liquide S.A. ADR (AIQUY)

Headquartered in Paris, France, AIQUY provides gasses, technologies, and services for the industrial and health sectors in Europe, the Americas, the Asia Pacific, the Middle East, and Africa. It operates in three segments: Gas & Services, Engineering & Construction, and Global Markets & Technologies.

In terms of the trailing-12-month gross profit margin, AIQUY’s 56.13% is 96.7% higher than the 28.53% industry average. Likewise, its 16.13% EBIT margin is 40.6% higher than the 11.47% industry average. However, the stock’s 0.60x trailing-12-month asset turnover ratio is 14.2% lower than the industry average of 0.70x.

AIQUY’s total revenue for the half year that ended June 30, 2023, decreased 1.6% year-over-year to €‎13.98 billion ($15.36 billion) while its net profit increased 31.9% year-over-year to €1.72 billion ($1.89 billion). Additionally, its net EPS increased 32% year-over-year to €3.30.

Analysts expect AIQUY’s revenue for the quarter ended December 31, 2023, to decrease 4.5% year-over-year to $7.62 billion. Its EPS for the fiscal 2023 is expected to increase 8.1% year-over-year to $1.40. Over the past year, the stock has gained 34.4% to close the last trading session at $38.01.

AIQUY’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system.

It has a C grade for Growth, Momentum, Sentiment, and Quality. It is ranked #30 in the same industry. To see AIQUY’s Value and Stability ratings, click here.

Stock #1: NewMarket Corp (NEU)

NEU primarily engages in manufacturing and selling petroleum additives through its subsidiaries. The company provides lubricant additives for various vehicle and industrial applications, including engine oils, transmission fluids, powertrain and hydraulic systems, gear oils, turbine oils, and applications with metal-to-metal moving parts.

On December 4, 2023, NEU announced the acquisition of AMPAC Intermediate Holdings, LLC, the parent company of American Pacific Corporation (AMPAC), for approximately $700 million. AMPAC is a leading North American manufacturer of critical performance additives used in space launch and military defense applications, expanding NEU’s exposure to mission-critical sectors.

Thomas E. Gottwald, Chairman and CEO at NEU, expressed excitement about acquiring AMPAC, stating its consistent cash generation, competitive strengths, and strategic importance. He believes NEU is the right long-term owner for this critical business and looks forward to welcoming the AMPAC team into the NEU family.

In terms of the trailing-12-month net income margin, NEU’s 14.57% is 147.9% higher than the 5.88% industry average. Likewise, its 19.27% EBIT margin is 68% higher than the 11.47% industry average. Additionally, the stock’s 48.51% trailing-12-month Return on Common Equity is 537.1% higher than the industry average of 7.61%.

For the fiscal third quarter that ended September 30, 2023, NEU’s net sales came in at $667.15 million. Its gross profit increased 36% year-over-year to $201.71 million. For the same quarter, the company’s net income and earnings per share came in at $111.25 million and $11.60, representing an increase of 76% and 83.5% over the prior-year quarter, respectively.

Over the past year, NEU’s stock has gained 76% to close the last trading session at $547.69.

NEU’s POWR Ratings reflect solid prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

It is ranked #2 in the Chemicals industry. It has a B grade for Stability and Quality. Click here to see NEU’s Growth, Value, Momentum, and Sentiment ratings.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

AIQUY shares were trading at $37.50 per share on Wednesday afternoon, down $0.51 (-1.34%). Year-to-date, AIQUY has declined -3.72%, versus a -1.02% rise in the benchmark S&P 500 index during the same period.

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.

More...