3 Chemical Specialty Stocks to Escape Industry Challenges

The Zacks Chemicals Specialty industry is mired in demand weakness, largely due to sluggishness in Europe and a slow economic recovery in China, as well as disruptions from tariffs. Margins of companies in this space also remain under pressure due to the still-elevated input, supply chain and logistics costs. 

Industry players, such as Perimeter Solutions, Inc. PRM, Element Solutions Inc ESI and Flexible Solutions International Inc. FSI are banking on strategic measures, including operating cost reductions, to tide over a persistently challenging environment.

About the Industry

The Zacks Chemicals Specialty industry consists of manufacturers of specialty chemical products for a host of end-use markets such as textile, paper, automotive, electronics, personal care, energy, construction, food & beverages and agriculture. These chemicals (including catalysts, surfactants, specialty polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose. Specialty chemicals can be single molecules or a combination of molecules referred to as formulations, and they provide a vast range of effects upon which various industries rely. Their compositions significantly influence the performance of the finished products. Specialty chemicals have applications in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics. 

What's Shaping the Future of the Chemical Specialty Industry?

Demand Weakness Pose Headwinds: Companies in the chemical specialty space are facing headwinds from demand softness in building and construction as well as industrial end markets, especially in Europe and China, due to economic slowdown. Elevated borrowing costs and inflation have taken a bite out of the residential construction industry. Manufacturing activities have also weakened amid softer demand for goods and higher borrowing costs. A slower recovery in economic activities in China is hurting demand in that country. The prevailing geopolitical tension, low consumer confidence and high inflation have also dampened demand in Europe. While customer inventory de-stocking is essentially complete, some lingering impacts of the same in certain markets are expected to continue over the near term. The imposition of hefty tariffs has also introduced significant headwinds for the chemical specialty industry. The soft demand conditions, exacerbated by the weak macroeconomic environment and tariff-induced impacts, are likely to weigh on the volumes of chemical specialty companies. 

Cost Pressure Still a Concern: Specialty chemical makers are facing headwinds from raw material and energy cost inflation, and supply-chain and freight transportation disruptions. Some companies are exposed to challenges from elevated logistics and labor costs. While raw material costs have moderated lately, driven by easing supply-chain disruptions, they remain higher than the pre-pandemic levels. Tariffs have also led to increased costs for raw materials, resulting in higher production expenses for the industry players. The lingering impacts of inflationary pressures are expected to continue over the short term and weigh on the margins of chemical specialty companies.

Self-help Actions to Support Results: The companies in this space are executing a raft of self-help measures — including cost-cutting and productivity improvement, expansion into high-growth markets, restructuring, operational efficiency improvement, and actions to strengthen the balance sheet and boost cash flows — in a bid to stay afloat amid the prevailing headwinds. The industry participants are aggressively implementing actions to cut costs. The measures are likely to help companies sail through the ongoing challenges.

Zacks Industry Rank Indicates Downbeat Prospects

The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #178, which places it in the bottom 26% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a bleak near-term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

 

Industry Underperforms Sector & S&P 500

The Zacks Chemicals Specialty industry has underperformed the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.

The industry has declined 10% over this period compared with the S&P 500’s rise of 16.8% and the broader sector’s increase of 11.9%.

One-Year Price Performance

 

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing chemical stocks, the industry is currently trading at 11.26X, below the S&P 500’s 18.6X and the sector’s 13.35X.

Over the past five years, the industry has traded as high as 14.19X, as low as 8.96X, with a median of 11.64X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

Enterprise Value/EBITDA (EV/EBITDA) Ratio 

3 Chemical Specialty Stocks to Keep a Close Eye on

Perimeter Solutions: Missouri-based Perimeter Solutions is a leading provider of solutions for the fire safety and specialty products industries. It is expected to benefit from the recovery of major end markets. Favorable industry trends are expected to continue to drive demand for fire-retardant products. The company remains focused on expanding its fire prevention and protection business. Its Specialty Products segment is seeing sales growth aided by a recovery from de-stocking activities and an increase in purchases by high-quality specialty chemicals customers. PRM’s strong balance sheet also offers adequate liquidity for growth investments and M&A opportunities. 

Perimeter Solutions currently carries a Zacks Rank #1 (Strong Buy). It has expected earnings growth of 9.9% for 2025. The Zacks Consensus Estimate for PRM’s 2025 earnings has moved up 10.9% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: PRM

Element Solutions: Florida-based Element Solutions is a leading specialty chemicals provider, offering innovative and differentiated solutions to its customers across a vast spectrum of industries. ESI is poised for growth, driven by strong execution and strategic positioning in the electronics sector, which underpins its robust long-term growth outlook. The company is benefiting from the strength in the electronics market. It is seeing strong organic growth in its Electronics segment, offsetting weakness in the industrial space. High-value end markets are contributing to a favorable product mix, while the ongoing pricing and productivity initiatives and lower raw material costs are boosting margins. 

The consensus estimate for Element Solutions’ earnings for the current year has moved 1.4% upward over the last 60 days. ESI surpassed the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 2.7%, on average. ESI currently carries a Zacks Rank #3 (Hold).

Price and Consensus: ESI

Flexible Solutions: Canada-based Flexible Solutions specializes in biodegradable, water-soluble products as well as energy and water conservation products for drinking water, agriculture, and industrial markets. The company remains committed to exploring new opportunities in applications such as detergent, water treatment, oil field extraction and agriculture to further expand sales in the NanoChem division, which accounts for a significant portion of the company’s revenues. FSI's cash resources are also expected to be adequate to meet its cash flow requirements and future commitments. FSI is expanding its presence in the food and nutrition supplement manufacturing markets. 

Flexible Solutions, carrying a Zacks Rank #3, has an expected earnings growth rate of 20.8% for 2025. The consensus estimate for FSI’s 2025 earnings has been stable over the last 60 days.

Price and Consensus: FSI

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Element Solutions Inc. (ESI): Free Stock Analysis Report
 
Flexible Solutions International Inc. (FSI): Free Stock Analysis Report
 
Perimeter Solutions, SA (PRM): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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