US auto recovery should drive 2010, 2011 chem earnings - analyst

14 January 2010 20:41  [Source: ICIS news]

Autos to drive earningsNEW YORK (ICIS news)--The US auto industry is “back from the dead” and will help drive chemical industry profit gains in 2010 and 2011, a Citigroup analyst said on Thursday.

“Auto manufacturing should pick up by around 35% in 2010,” Citigroup chemical analyst PJ Juvekar said in a research note.

Robust sales in the auto industry translate into demand for chemical producers, who supply car parts makers.

The American Chemistry Council (ACC) estimates that 331lb (150kg) of plastics is used in every automobile made in the US and an average of $2,700 (€1,863) worth of chemical products or chemical processing value goes into every US-made vehicle.

Citigroup’s auto analyst expects light vehicle production to rise to 11.5m units in 2010 from 8.5m in 2009.

In addition, auto inventories have been coming down, and on the plastics side, “in general, inventories remain very low, according to converters we talked to,” Juvekar added.

China’s booming auto market also bodes well for the chemical industry, he said.

China’s passenger vehicle sales in November rose about 98% year over year to around 1m units,” said Juvekar.

“Key beneficiaries of increasing auto builds include PPG Industries, where autos represent 14% of sales, DuPont (13%), Celanese (8%) and Dow Chemical (8%),” he added.

The analyst adjusted 2009 and 2010 earnings per share (EPS) estimates upward for a number of companies, including DuPont, Dow, Nalco, Air Products and Praxair.

For Dow, he upped his 2010 EPS estimate by 10 cents, to $0.47, and his 2011 forecast by eight cents, to $1.65.

For DuPont, Juvekar raised his 2010 estimate by six cents, to $2.01, and his 2011 number by 15 cents, to $2.35.

Juvekar said investor focus on fourth quarter earnings season will likely shift to the top line (sales growth) as opposed to the bottom line (earnings), as well as for the 2010 outlook.

“For Q4 we expect investors will be less impressed with bottom line beats in the absence of meaningful top-line revenue growth,” he said.

“In addition to top-line growth, we believe investors will pay close attention to companies’ 2010 outlook, especially given that management teams have been hesitant to provide forward guidance thus far,” Juvekar added.

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