2024 Buy or Hold Chemical Stocks?

The chemical sector displays substantial resilience, propelled by robust demand for chemicals utilized in a variety of industries for transforming raw and precursor materials into valuable products that respond to society's needs. Given the industry’s promising prospects, in this piece, we assessed three chemical stocks to determine how they can help investors tap into the industry's tailwinds.

Linde plc (LIN) and NewMarket Corporation (NEU) appear to be solid buy candidates for 2024, given their strong fundamentals. On the other hand, I think Dow Inc. (DOW) should be kept on one's watchlist for better entry opportunities.

Before delving deeper into the fundamentals of the three stocks, let’s take a quick look at the industry landscape.

Chemicals are as fundamental to the economy as the more overt technologies. Used in everything from processed foods as artificial sweeteners and preservatives to the manufacture of everyday items, which utilize advanced polymers or affordable synthetics to accommodate cost considerations, the chemical industry extends its influence to countless elements within our homes or workplaces.

The chemical industry, deeply embedded in the U.S. economy, accounts for over 85% of basic and specialty chemicals consumed by the industrial sector. Its influence permeates both micro and macroeconomic levels, underscoring its significant impact. The industry has demonstrated impressive financial performance, hitting those that have remained unmatched for over two decades. It contributes over a quarter to the nation's GDP, propelled by heightened demand.

Moreover, new government policies and incentives promoting investment in energy transition have spurred additional manufacturing activity dependent on chemicals and materials. Over 75% of technologies reducing emissions are rooted in the chemical industry.

Advancements in digital technology are also reshaping the landscape for chemical manufacturers. Producers are expected to use various digital tools to create innovative materials and streamline efficient formulations – evaluating, optimizing, and incorporating ingredient recipes and proprietary knowledge.

Consequently, the global chemical market is anticipated to grow at a CAGR of 8.8% until 2032.

Given the industry tailwinds, it's time to examine the fundamentals of the three stocks in the Chemicals industry, starting with the starting with the third in line.

Stock #3: Dow Inc. (DOW)

DOW engages in the provision of various materials science solutions for packaging, infrastructure, mobility, and consumer applications. It operates through Packaging & Specialty Plastics; Industrial Intermediates & Infrastructure; and Performance Materials & Coatings segments.

On December 21, 2023, DOW successfully addressed today's challenges of achieving net zero by 2050 in the cable industry by developing a new compound - ENDURANCE HFDD-4201 for Cable Systems.

It offers a next-generation cross-linked polyethylene (XLPE) compound for high-voltage cable insulation that helps manufacturers improve production efficiency while lowering associated carbon emissions. 

On December 8, DOW paid a dividend of 70 cents per share to the shareholders. This marks the 449th consecutive dividend paid by the company or its affiliates since 1912, reflecting upon the company’s strong cash generation ability.

Its annualized dividend rate of $2.80 per share translates to a dividend yield of 5.06% on the current share price. Its four-year average yield is 5.36%.

DOW’s trailing-12-month cash from operations of $5.62 billion is significantly higher than the industry average of $415.73 million, while its trailing-12-month cash per share of $4.39 is 182.3% higher than the industry average of $1.56.

For the fiscal third quarter that ended September 30, 2023, DOW’s net sales and free cash flow stood at $10.73 billion and $1.06 billion, respectively. Moreover, its non-GAAP operating EBIT stood at $626 million.

For the same quarter, its non-GAAP net income and non-GAAP operating EPS stood at $345 million and $0.48, respectively.

Street expects DOW’s revenue and EPS in the fiscal first quarter ending March 2024 to be $11.52 billion and $0.55, respectively. The company surpassed consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive.

The stock has gained 7.1% over the past three months to close the last trading session at $54.63. Over the past year, it has gained 7%.

DOW’s fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

DOW has a B grade for Value. Within the Chemicals industry, it is ranked #39 out of 84 stocks.

Beyond what we’ve stated above, we have also rated the stock for Growth, Momentum, Stability, Sentiment, and Quality. Get all ratings of DOW here.

Stock #2: Linde plc (LIN)

Headquartered in Woking, the United Kingdom, LIN offers atmospheric gases, including oxygen, nitrogen, argon, and rare gases; and process gases, such as carbon dioxide, hydrogen, electronic gases, and acetylene. The company’s operations consist of two core product lines: industrial gases; and engineering.

On December 18, LIN paid shareholders a quarterly dividend of $1.28 per share. Its annualized dividend rate of $5.10 per share translates to a dividend yield of 1.25% on the current share price.

Its four-year average yield is 1.47%. LIN’s dividend payments have grown at CAGRs of 18.3% and 9.5% over the past three and five years, respectively. The company has a record of paying dividends for 31 consecutive years.

Additionally, LIN’s Board of Directors approved a new share repurchase program for up to $15 billion of LIN's ordinary shares. The company had $2 billion of repurchase authority available under its previously announced buyback authorization from February 2022, giving it $17 billion available for stock repurchases under these programs.

On December 5, 2023, LIN increased the liquid hydrogen production capacity at its facility in McIntosh, Alabama. LIN's McIntosh facility now produces up to 30 tons per day of liquid hydrogen for the local merchant market.

The plant will meet the increasing demand for hydrogen from LIN's existing and new customers in end markets, including manufacturing and electronics. LIN invested approximately $90 million in the project.

LIN’s VP of East Region, Todd Lawson, said, "As demand for liquid hydrogen continues to grow, we are proud to leverage our technology and expertise to safely start up this project on time and on budget."

LIN’s trailing-12-month cash from operations of $8.67 billion is significantly higher than the industry average of $415.73 million. Its trailing-12-month net income and levered FCF margins of 18.44% and 11.81% are 214.1% and 187.6% higher than the industry averages of 5.87% and 4.11%, respectively.

For the fiscal third quarter that ended September 30, 2023, LIN’s sales stood at $8.16 billion, while adjusted operating profit increased 14.7% year-over-year to $2.31 billion. Moreover, its adjusted EBITDA stood at $3.07 billion, up 12.2% from the year-ago quarter.

For the same quarter, its adjusted net income and adjusted EPS increased 14.7% and 17.1% from the prior-year quarter to $1.78 billion and $3.63, respectively.

Street expects LIN’s revenue and EPS for the fiscal first quarter ending March 2024 to increase 3.3% and 8.6% year-over-year to $8.46 billion and $3.71, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters.

The stock has gained 28.4% over the past year to close its last trading session at $408.71. Over the past nine months, it has gained 14.1%.

LIN’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.

LIN has a B grade for Stability, Sentiment, and Quality. Within the same industry, it is ranked #26.

Beyond what we’ve stated above, we have also rated the stock for Growth, Value, and Momentum. Get all ratings of LIN here.

Stock #1: NewMarket Corporation (NEU)

NEU develops, manufactures, markets, and sells formulated lubricant and fuel additive packages. The company operates through the Petroleum Additives segment.

On January 2, NEU paid shareholders a quarterly dividend of $2.25 per share on the company’s common stock. Its annualized dividend rate of $9 per share translates to a dividend yield of 1.63% on the current share price. Its four-year average yield is 2.20%. NEU’s dividend payments have grown at CAGRs of 5.2% and 4.8% over the past three and five years, respectively.

On December 4, 2023, NEU entered into a definitive purchase agreement to acquire AMPAC Intermediate Holdings, LLC, the ultimate parent company of American Pacific Corporation, for approximately $700 million.

AMPAC is the leading North American manufacturer of critical performance additives used in solid rocket motors for space launch and military defense applications. The acquisition of AMPAC expands NEU’s exposure to mission-critical, resilient sectors.

NEU’s trailing-12-month asset turnover ratio of 1.18x is 68.3% higher than the industry average of 0.70x. Its trailing-12-month net income and levered FCF margins of 14.57% and 13.90% are 148.2% and 238.5% higher than the industry averages of 5.87% and 4.11%, respectively.

For the fiscal third quarter that ended September 30, 2023, NEU’s net sales stood at $667.15 million, while gross profit increased 36% year-over-year to $201.71 million. For the same quarter, its net income and earnings per share stood at $111.25 million and $11.60, up 76% and 83.5% from the prior-year quarter, respectively.

As of September 30, 2023, NEU’s total current liabilities stood at $332.20 million, compared to $423.89 million as of December 31, 2022.

The stock has gained 71% over the past year to close its last trading session at $552.31. Over the past nine months, it has gained 51%.

NEU’s robust prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.

NEU has a B grade for Stability and Quality. It is ranked #2 within the same industry.

Click here for the additional POWR Ratings for NEU (Growth, Value, Momentum, and Sentiment).

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LIN shares were unchanged in premarket trading Thursday. Year-to-date, LIN has declined -0.49%, versus a -1.37% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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