OUTLOOK ’09: Wall Street expects profit declines

24 December 2008 19:01  [Source: ICIS news]

Wall Street expects lower earningsBy Joseph Chang

NEW YORK (ICIS news)--Wall Street expects mostly lower earnings for the North American chemical sector in 2009 as the world economic slowdown hits demand.

As of mid-December, consensus forecasts call for mostly double-digit declines of earnings per share (EPS) in 2009. However, estimates for some specialty firms still show expected profit gains (see chart below).

And the fourth quarter of 2008 will be a rough one for the industry, with Dow Chemical expected to post EPS of 17 cents versus 84 cents in the year-ago period, and DuPont expected to record a loss of 24 cents versus a profit of 57 cents in the fourth quarter of 2007.

“The fourth quarter is as bad as you could imagine, with massive inventory destocking occurring on top of weak demand and typical year-end uncertainties. It’s been more severe in Asia and Europe than in the US,” said Deutsche Bank analyst David Begleiter.

“We’re seeing volume declines of 30-40% this quarter - customers are just destocking their inventories and not ordering,” he added.

The destocking trend is likely to continue at least through the first quarter of 2009 and European chemical companies will also feel the hurt, said ING analyst Paul Satchel, who likened the chemical sector to “an earthquake zone”.

“The breadth and depth of the demand dislocation are profound, and we expect another round of estimate downgrades, threatening stock prices further,” Satchel said.

“We see the sector as significantly at risk of a further downward correction in the next six months,” Satchel added.

With the industry experiencing “unprecedented uncertainty,” Satchel has become even more bearish on the sector, slashing profit estimates across the board. He downgraded Germany-based BASF, Belgium’s Solvay and Dutch giant DSM to “sell” ratings from “hold.”

“While we recognise that fair value for each of these companies lies well above current levels, we contend that fair value is wholly irrelevant in current conditions,” he said. “Uncertainty is the key, and the operational risks are clearly on the downside.”

Profitability through the first half of 2009 will be tough, said Jefferies & Co analyst Laurence Alexander.

“You have inventory liquidation and companies wrestling with end-market pricing dropping quickly - in some cases so quickly that they can’t pass through high-cost inventory,” Alexander said.

“The fourth quarter of 2008 and the first quarter of 2009 are going to be very, very tough for specialty chemical companies,” said Longbow Research analyst Dmitry Silversteyn.

“Basically, everyone is looking to finish the year with bare-shelves inventory,” he added. “Over the next six months, I expect a drastic double-digit reduction in volumes for most markets.”

Looking to raw materials, petrochemicals and other input prices are falling, along with just about every other asset class.

The ICIS Petrochemical Index (IPEX) for December plunged by a record 27% to 211.44, eclipsing November’s record 13% month-over-month decline.

However, it could take time before specialty chemical companies benefit.

“We’re not seeing raw material prices decline meaningfully yet for specialty chemical firms even as we see upstream petrochemical prices down sharply,” Silversteyn said. “It takes time - a quarter or two - for these raw material declines to filter down the supply chain,” said Silversteyn.

A more stable demand environment could emerge once inventory liquidation runs its course by the second half of 2009, analysts said. However, earnings visibility could still be cloudy over the next few months.

 “We’re not going to see what real demand is like until the first or second quarter of 2009,” Silversteyn said. “I don’t think companies will have a very good idea when they give 2009 guidance on the upcoming fourth quarter conference calls.”

Deutsche Bank’s Begleiter said that by the second half of 2009, the industry should return to a more normalised level of behaviour and activity, “even though this could be at recessionary levels.”

The analyst said he sees earnings per share (EPS) for the US chemical sector going down on the order of 10-50% in 2009.

Wall Street Profit Outlook





Consensus earnings per share estimates











E2008 EPS

E2009 EPS

% Change

Stock price*

P/E (2009)







Dow Chemical


















NOVA Chemicals












Eastman Chemical






























Cytec Industries






PPG Industries


















Arch Chemical
























* As of the close of December 17, 2008




 To discuss issues facing the chemical industry go to ICIS connect
For more analysis and insight on Wall Street’s outlook for 2009 and top picks, look for the 5 January issue of ICIS Chemical Business magazine
Bookmark Paul Hodges’ Chemicals and the Economy Blog


By: Joseph Chang
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