US chemicals sector set for solid earnings growth in 2022 – Wells Fargo

Joseph Chang

06-Jan-2022

NEW YORK (ICIS)–US chemicals companies are poised for strong earnings growth in 2022, building on last year’s gains, even amid inflation and pandemic impacts, a Wall Street analyst said on Thursday.

“We believe the combination of positive volume growth and pricing finally catching up to inflation should keep organic sales growth in the mid-to-high single digits in 2022, which assumes positive global GDP. We also sense that housing/construction demand should remain a tailwind, with upside from the potential of a recovery in auto,” said Wells Fargo analyst Michael Sison in a research note.

“Heading into 2022, we believe the chemical sector can generate positive earnings per share (EPS) growth and leverage strong balance sheets to return cash to shareholders or acquire growth,” he added.

The chlor-alkali sector could buck the overall downtrend in commodities, supported by limited new capacity additions in the coming years. On this theme, Westlake Chemical is one of the analyst’s stop picks, along with Celanese and DuPont.

WESTLAKE TO SEE VINYLS BOOST

Westlake should benefit from higher housing construction activity, which would drive demand for polyvinyl chloride (PVC). The company’s Vinyls segment could see 13% growth in earnings before interest, tax, depreciation and amortisation (EBITDA), which should offset softer olefins margins, according to Sison.

Westlake also is underappreciated by investors, trading at just around 4.5x estimated 2022 EV/EBITDA (enterprise value/EBITDA), he noted.

“We see upside to our $130 price target, which still reflects only 6x our 2022 EBITDA estimate,” said Sison.

Shares of Westlake Chemical closed at $101.50 on 5 January.

DUPONT RESTRUCTURING TO LEAD TO RE-RATING

DuPont’s strategic restructuring plans, which include divesting the majority of its Mobility & Materials (M&M) segment while acquiring electronic materials company Rogers, should spark a re-rating of its stock, according to the analyst.

“We see the Rogers deal as accretive across all metrics (EPS, cash flows, revenues) upon close, and believe the… M&M divestitures will garner an attractive multiple (we anticipate between 12-15x EV/EBITDA), which streamlines the portfolio into a higher margin, higher growth asset base,” said Sison.

“As a result, we expect multiple rerating and reiterate… our price target of $99, which reflects 14x estimated 2022 EBITDA,” he added.

Shares of DuPont closed at $81.79 on 5 January.

CELANESE HAS VALUE-CREATING OPTIONALITY

Meanwhile, Celanese is poised to benefit from strategic portfolio changes (Polyplastics JV sale, Santoprene acquisition), organic growth from its Engineered Materials segment along with bolt-on deals, along with an improved acetyls chain outlook and the expected completion of its Clear Lake, Texas acetic acid expansion by 2023, according to the analyst.

“Given strong free cash flow generation over the next few years, we see many options for management to deploy capital, including dividends, share buybacks, and the potential for additional M&A,” said Sison.

“We expect the company’s numerous organic growth projects, coupled with a recovery in the auto build rates and numerous sustainability initiatives, will likely drive the next phase of EPS growth beyond $15/share, starting in 2023,” he added.

The analyst has a $210 price target for Celanese. Share of Celanese closed at $173.82 on 5 January.

Focus article by Joseph Chang

Thumbnail image by Shutterstock 

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