Plastic Play
Plastics Stocks for Investing
“I just want to say one word to you…just one word. Are you listening? Plastics…There’s a great future in Plastics.” – Mr. McGuire to Ben Braddock in The Graduate
The Graduate was released in 1967, but Mr. McGuire’s advice about plastics would make for some pretty good stock ideas in 2010.
Plastics
Plastics play an influential part in our daily lives thanks to their flexibility and low costs. Plastics are used in everything from car parts to doll parts; from soft drink bottles to refrigerators; our homes, cars, televisions, mobile phones; and countless other products that we use on a daily basis.
Specialty chemical companies that manufacture plastics such as acrylics, polymers and resins are closely linked to the global economy. When the economy is expanding, these companies are growing. Conversely, if economic growth slows, these firms are some of the first to see sales decline.
Global Economic Recovery
During the recession, industrial firms reduced their plastics orders to levels that matched demand. They also reduced the amount of plastics inventory on hand to help reduce costs. When economic conditions began to stabilize and finally improve, those firms ramped up plastics orders to specialty chemical companies.
The economic recovery remains underway, and industrial markets around the globe continue to experience strong demand. This continued economic growth will lead to even more specialty chemical orders from autos, construction and technology, and plastics companies will continue to experience solid top-line growth.
Operating Leverage
Due to their economically-sensitive business models, specialty chemical companies were hit hard during the economic downturn. In response, the entire plastics industry underwent immense cost-cutting efforts to deal with large revenue losses. When conditions finally stabilized, many of these same plastics companies found themselves with vastly improved cost structures. More notably, the leaner operations are enabling these specialty chemical companies to generate substantial operating leverage.
In other words, sales are growing at a quicker rate than operating expenses. This results in higher profit margins and robust earnings growth. And with global economic activity gaining steam, specialty chemical companies should continue to enjoy strong top-line growth and even stronger bottom-line growth.
How to Profit from Plastics Stocks
We looked for specialty chemical companies that manufacture plastics with a Zacks Rank of #1 or #2 and are positioned to continue beating analyst estimates for the next few quarters. Below are four plastics stocks that we think could have great future in plastics.
Ashland Inc. (ASH)
Ashland Inc. operates as an international specialty chemicals company. This plastics company has five operating segments including Ashland Distribution, which distributes chemicals, plastics and composite raw materials.
The Ashland company implemented cost-cutting initiatives to combat the economic downturn. Those cost cuts appear to be sustainable. Meanwhile, this plastics company is now experiencing improving demand in its end markets.
In the last 30 days, there have been eleven upward estimate revisions versus three downward revisions. The 2010 Zacks Consensus Estimate is up 8 cents, or 2.1%, to $3.82, while the 2011 Zacks Consensus Estimate is up 13 cents, or 3.2%, to $4.23.
Ashland is scheduled to report second-quarter results on April 27. Given its recent track record — it has beaten the Zacks Consensus Estimate for the last five quarters by an average of 38.1% — the company should be in a position to deliver another strong earnings report.
The Zacks #1 Rank stock trades at a reasonable 17x fiscal 2010 EPS estimates and 15x fiscal 2011 EPS estimates.
PPG Industries (PPG)
The PPG Industries plastics company manufactures and supplies protective and decorative coatings. PPG’s plastics products are used in automotive and commercial transport repair and refurbishing, specialty coatings for signs, and sealants, coatings and technical cleaners for commercial and military aircraft.
PPG reported strong first-quarter results on April 15. It had sales of $3.1 billion, up 12% versus the prior year’s first quarter. PPG had earnings of $0.70 per share, topping the Zacks Consensus by 7 cents, or 11.1%. For the last five quarters, PPG has beaten the Zacks Consensus by an average of 22.0%.
The plastics company indicated that profit margins in its industrial coatings business have returned to levels not seen since before the economic downturn.
After the PPG company’s strong Q1 earnings report, analysts increased their estimates for 2010 and 2011. Since that report, the Zacks Consensus Estimate for 2010 is up 24 cents, or 6.2%, to $4.13, and the 2011 Zacks Consensus Estimate is up 17 cents, or 3.9%, to $4.59.
PPG Industries is a Zacks #2 Rank stock. It is trading 17x 2010 EPS estimates and 16x 2011 EPS estimates.
Stepan Company (SCL)
Stepan Company produces and sells specialty and intermediate chemicals. The company operates in three segments: Surfactants, Polymers and Specialty Products. Its products can be found in industrial cleaning products, lubricating materials and construction materials.
On April 20, Stepan Company reported solid first-quarter results. Net sales were up 5.9% with an 8% increase in sales volume. The company reported earnings per share of $1.76, easily beating the Zacks Consensus by $1.32, or 33.3%.
The company has beaten consensus estimates in four of the last five quarters. In those earnings beats, SCL beat the consensus by an average of 69.1%.
Stepan Company’s strong first-quarter results prompted analysts to boost their estimates for the next two years. In the last week, the Zacks Consensus Estimate for 2010 jumped 53 cents, or 12.2%, to $4.86. The Zacks Consensus Estimate for 2011 also climbed 46 cents, 9.9%, to $5.12.
This Zacks #1 Rank stock trades at 16x consensus estimates for 2010 and 15x consensus estimates for 2011.
Westlake Chemical Corp. (WLK)
Westlake Chemical manufactures and markets basic chemicals, vinyls, polymers and fabricated products. It operates in two segments, Olefins and Vinyls.
The company reported fourth-quarter results on February 23. Sales increased 5.5% to $630.0 million. It also reported EPS of $0.19, matching the Zacks Consensus. In the previous three quarters, Westlake beat the Zacks Consensus by an average of 76.5%. The company is scheduled to report first-quarter results on May 4.
Even though the company hasn’t reported earnings in about two months, analysts have been lifting their earnings estimates. In the last 30 days, the Zacks Consensus for 2010 is higher by 15 cents, or 15.0%, to $1.15, while the Zacks Consensus is up 11 cents, or 9.1%, $1.32.
Interestingly, WLK shares are up about 74% in the last year, but analysts covering the company are not bullish on the stock. There are 7 analysts covering WLK. There is 1 Strong Buy rating, 4 Hold ratings, and 2 Strong Sell ratings. The lack of optimism among the analysts suggests that EPS estimates for WLK may be too pessimistic, making it easier for the company to beat expectations.
Westlake Chemical Corp. has a Zacks #2 Rank. It plastics stocks trades at 26x 2010 consensus estimates and 22x 2011 consensus estimates.
About the Author
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