The Zacks Chemicals Specialty industry remains plagued by headwinds from soft demand, largely due to the sluggishness in Europe and a slow economic recovery in China. Margins of companies in this space also remain under pressure due to the still-elevated input, supply chain and logistics costs. 

Industry players like Axalta Coating Systems Ltd. AXTA, Ingevity Corporation NGVT 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?

Headwinds From Demand Slowdown: 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 the 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 ongoing geopolitical tension and high inflation have also dampened demand in Europe. While customer inventory de-stocking is almost complete, some lingering impacts of the same in certain markets are expected to continue over the near term. The demand slowdown is likely to weigh on the volumes of chemical specialty companies.

Cost Pressure Still a Worry: Specialty chemical makers are facing headwinds from raw material 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 somewhat lately, driven by easing supply-chain disruptions, they remain higher than the pre-pandemic levels. The lingering impacts of inflationary pressures are expected to continue over the short haul and weigh on the margins of chemical specialty companies.

Strategic Actions to Aid 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 28% 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 and S&P 500

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

The industry has lost 20.1% over this period compared with the S&P 500’s rise of 17.1% and the broader sector’s decline of 3.1%. 

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 22.1X, above the S&P 500’s 17.59X and the sector’s 11.84X.

Over the past five years, the industry has traded as high as 22.53X, as low as 7.73X, with a median of 11.72X, 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

Axalta Coating Systems: Pennsylvania-based Axalta is a global coatings company engaged in the manufacturing, marketing and distribution of coatings solutions. AXTA is benefiting from the strength in the refinish business, which is offsetting the weakness in industrial markets. The acquisition of CoverFlexx Group has enhanced Axalta's refinish business by incorporating an extensive range of automotive refinish and aftermarket coatings, including primers, basecoats, clearcoats and various detailing products of the former. Axalta has also strategically expanded its portfolio by acquiring Andre Koch AG, a well-established Refinish distribution partner headquartered in Switzerland. In the Mobility Coatings unit, AXTA is seeing strong light vehicle volume performance in China and Latin America.

Axalta, carrying a Zacks Rank #1 (Strong Buy), has expected earnings growth of 7.2% for 2025. The Zacks Consensus Estimate for AXTA’s 2025 earnings has been revised upward by 5.9% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: AXTA

Ingevity: South Carolina-based Ingevity is a global producer of high-performance activated carbon materials and specialty chemicals. The company is expected to benefit from the repositioning of its Performance Chemicals segment, which aims to lower exposure to lower-margin end markets. Operational improvements leading to lower input costs and better manufacturing efficiency are also aiding performance in its Performance Materials unit. Ingevity is taking several actions to expand capacity and drive long-term growth. The acquisition of Ozark Materials has also strengthened the company’s position in the paving construction industry.

Ingevity has expected earnings growth of 26.8% for 2025. It surpassed the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 202.9%, on average. NGVT carries a Zacks Rank #1. 

Price and Consensus: NGVT

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 grow 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. The recent contract with a U.S.-based company to manufacture food-grade products underscores FSI’s move to enter the food-grade market and build a strong base as it looks to obtain more business in food-grade products.

Flexible Solutions, carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 50% for 2025. The consensus estimate for FSI’s 2025 earnings has been revised upward by 12.5% over the last 60 days.

Price and Consensus: FSI

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Flexible Solutions International Inc. (FSI) : Free Stock Analysis Report

Axalta Coating Systems Ltd. (AXTA) : Free Stock Analysis Report

Ingevity Corporation (NGVT) : Free Stock Analysis Report

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

Zacks Investment Research