The chemicals industry lies at the center of the production, manufacturing, and industrial boom worldwide. The industry faced the heat from a significant downturn in demand last year in the wake of the COVID-19 pandemic. The contagion brought global industrial activities to a grinding halt due to the unprecedented manufacturing shutdowns, leading to a slump in demand for chemicals in key major markets, including automotive, construction, and electronics. Additionally, the industry faced major headwinds from the short supply of raw materials as a result of the crisis.
However, a strong recovery in the chemicals industry is underway as reflected by the recent upbeat manufacturing data from the United States. Deloitte believes chemical industry revenues will grow about 8% in 2021, after facing a decline of 9% in 2020. In fact, the domestic manufacturing sector has already started gaining strength.
Given this favorable backdrop, RPM International Inc. (RPM) and NewMarket Corp (NEU) are well positioned to deliver solid returns this year on the back of their durable businesses as well as progressive management.
RPM International Inc. (RPM)
RPM manufactures and sells specialty chemicals for the industrial, specialty, and consumer markets worldwide. The company is a world leader in specialty coatings, sealants, building materials and related services. RPM has a diverse portfolio with hundreds of market-leading brands that operates across four segments – consumer, construction products, performance coatings and specialty products.
On February 9, 2021, RPM received notification of an unsolicited mini-tender offer by TRC Capital Investment Corporation to purchase up to 1.5 million shares, or about 1.15%, of RPM’s outstanding common stock. RPM recommended that stockholders rejected the tender offer. The company does not endorse the same because it was underpriced and that the offer did not provide investors with the same level of protections provided for larger tender offers under US federal securities laws.
RPM has recently informed its shareholders that the company expects the financial results for its fiscal third quarter ending February 28, 2021 to be below its initial guidance due to the impact of severe winter weather across the United States. In the second quarter that ended November 30, 2020, RPM generated record sales of $1.49 billion, increasing 6% year-over-year and were boosted by the acquisition of Ali Industries. Record cash from operations of $579.5 million for the first half was due to margin improvements and good working capital management. Additionally, EPS came in at $0.15, rising 66.1% year-over-year.
Though the stock has gained only 12% in the past year, RPM is in line with its operating improvement plan, known as the “MAP to Growth.” The program generated strong leverage to the bottom line in the previous quarter, despite moderate sales growth. The company is aggressively managing discretionary cost cuts and proactive management to improve its product mix. As a result, Wall Street analysts estimate the company’s current year revenue and EPS to improve 8.1% and 38.4%, respectively.
RPM’s POWR Ratings reflect this promising outlook. RPM has an overall rating of A, which equates to Strong Buy in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
It has a grade of A for Growth and a B for Stability. Of the 97 stocks in the A-rated Chemicals industry, it is ranked #2.
In total, we rate RPM on eight different levels. Click here to check additional POWR Ratings for RPM (Value, Sentiment, Momentum, and Quality).
NewMarket Corp (NEU)
NEU, through its subsidiaries Afton Chemical Corporation and Ethyl Corporation, develops, manufactures, blends, and delivers chemical additives that enhance the performance of petroleum products. From custom-formulated additive packages to market-general additives, NEU provides technology to make engines run smoother, machines last longer, and fuels burn cleaner.
Throughout the economic downturn, NEU’s products have been recognized as essential for the transportation of goods and services. As restrictions eased and economies reopened in the second half of 2020, global production of automobiles has begun to rebound, and gasoline consumption and miles driven are showing steady improvement in most countries, including the United States.
For the full-year that ended December 31, 2020, petroleum additives sales were $2.0 billion compared to $2.2 billion in the prior period. This decrease was due mainly to lower shipments and decreased selling prices. Shipments fell 5.2%, with decreases in both lubricant additives and fuel additives shipments. As a result, operating profit for the year declined 7.2% to $333.2 million. However, NUE delivered EPS of $24.64, compared to the year-ago value of $22.73.
NEU has a prime exposure to the car industry, and despite oil price weakness and the EV boom, the stock has fared well last year. However, the global oil market has stabilized and prices have already progressed above the pre-pandemic levels. NEU generated strong cash flows last year and plans to deliver solid operating results going forward on the back of customer-focused solutions, technology-driven product offerings, and a world-class supply chain capability. The stock has already gained nearly 8% in the past three months but is well-positioned to garner further momentum as analysts expect the company’s EPS to rise at the rate of 7.7% per annum over the next five years.
It is no surprise that NEU has an overall rating of A, which translates to Strong Buy in our POWR Ratings system. NEU has a grade of B for both Value and Stability. It is further ranked #5 in the Chemicals industry.
Click here to see the additional POWR Ratings for NEU (Growth, Momentum, Sentiment and Quality).
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RPM shares were trading at $81.38 per share on Tuesday afternoon, down $1.17 (-1.42%). Year-to-date, RPM has declined -9.96%, versus a 3.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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