14 October 2011 16:49 [Source: ICIS news]
By Joseph Chang
It’s one thing to argue that chemical stocks are cheap – they may well have hit the bottom as investors deserted the sector along with other industrial materials equities – but another to cling to the hope that 2012 earnings will exceed the relatively robust results for all of 2011 in this type of macroeconomic environment.
If chemical company profit estimates are based on forecasted GDP figures, which analysts cite often in laying out their investment thesis, then when those GDP forecasts are cut, the earnings estimates should follow suit immediately. However, that is rarely the case – and this is not particular to the chemical sector. It tends to happen across the board in economically cyclical sectors.
Economists have been ahead of the curve this time, taking the axe to US and global GDP forecasts in the summer. Now financial analysts are rolling back their earnings forecasts.
The latest round of profit forecast reductions came from US-based investment banks Wells Fargo and JP Morgan on 12 October, amid slowing global economic growth, weaker demand and lower margins.
“We are of the belief that third quarter earnings will hold up relatively well across chemicals – up more than 20% year on year – but see some downside risk to fourth quarter estimates as near-term industry dynamics (lower oil, higher ethane) and cautious purchasing behaviour are impacting olefin margins,” said Wells Fargo analyst Frank Mitsch in a research note.
He lowered profit forecasts for Netherlands-based LyondellBasell (2011 and 2012) and US-based companies
He now expects LyondellBasell and
Temporary market dislocations have compressed olefins margins, which could face pressure through the end of the year, noted the analyst.
“Dow’s delayed [maintenance on] its St Charles [Louisiana] ethylene cracker from the third quarter to early 2012 or possibly even 2013 has effectively raised ethane prices while putting pressure on ethylene,” said Mitsch. That cracker has a nameplate capacity of 610,000 tonnes/year of ethylene, according to ICIS.
JP Morgan analyst Jeffrey Zekauskas slashed his 2011, 2012 and 2013 earnings per share estimates for US-based DuPont. He now expects only slightly higher profits next year – earnings per share of $3.90 (€2.81) in 2012, versus $3.85 in 2011.
“Volume growth in the cyclical end markets, including construction, electronics/solar and automotive, has likely slowed or turned negative,” he said.
On 11 October, Jefferies & Co analyst Laurence Alexander slashed his 2011 earnings per share estimate for LyondellBasell by $0.40, to $4.70, on lower-than-expected ethylene margins in the fourth quarter. He expects the company’s earnings per share to decline to $3.70 in 2012.
The latest round of profit cuts by Wall Street analysts follows US-based investment bank Susquehanna International Group analyst Don Carson cutting his profit estimates on Dow Chemical, LyondellBasell,
And it’s not just
These types of earnings declines for 2012 are far more realistic in the current macroeconomic climate than growth projections, regardless of the drivers of individual company performance.
The third-quarter earnings season is upon us. Following the investor conference calls, expect yet another round of profit chops to come.($1 = €0.72)
Paul Hodges studies key influencers shaping the chemical industry in his Chemicals and the Economy blog for ICIS
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