The chemical industry is a major part of the U.S. manufacturing sector, supplying vast domestic and international markets. Despite worries about carbon emissions, supply chain challenges, and high input costs, the chemical industry's rebound has been driven primarily by robust demand for commodity and specialty chemicals.
Chemical demand is estimated to rise due to increased use in high-end markets such as automotive and construction. Furthermore, rapid organizational transformation through modern technologies is anticipated to promote the growth of the chemical sector in the coming years. Consequently, the global chemical market is expected to reach $6371.09 billion by 2026, registering a CAGR of 8.4%.
Given this backdrop, we think it could be wise to buy the stock of fundamentally sound chemical companies Valhi Inc. (VHI) and American Vanguard Corporation (AVD), which are yet to attract significant investor attention.
Valhi Inc. (VHI)
VHI operates in the chemicals, component products, and real estate management and development industries in Asia Pacific, Europe, North America, and globally. The firm operates via its subsidiaries, which include NL Industries, Inc., Kronos Worldwide, Inc. (Kronos), CompX International, Inc. (CompX), Tremont LLC, Basic Management, Inc. (BMI), and the LandWell Company (LandWell).
VHI's total net sales increased 23.6% from the year-ago value to $629 million for the first quarter ended March 31, 2022. Its operating income grew 96.3% year-over-year to $100.7 million. The company's net income surged 213.1% from the prior-year quarter to $45.4 million, while its EPS rose 205.8% year-over-year to $1.59.
Analysts expect the EPS to increase 114.6% year-over-year to $9.57 in fiscal 2022. The consensus revenue estimate of $2.66 billion in fiscal 2022 represents a 15.9% increase from the same period last year. The stock has gained 77.9% over the past six months and 68.8% year-to-date.
VHI's POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VHI has also rated an A grade for Growth, Value, and Sentiment. Within the A-rated Chemicals industry, it is ranked #1 of 89 stocks. Click here to see additional POWR Ratings for Quality, Momentum, and Stability for VHI.
American Vanguard Corporation (AVD)
AVD develops, produces, and markets specialty chemicals for agricultural, commercial, and consumer purposes in the United States and globally through its subsidiaries. It sells its products through national distribution corporations, buying groups or co-operatives, sales offices, salesforce executives, sales agents, and wholly-owned distributors.
For the first quarter ended March 31, 2022, AVD's net sales increased 28.7% from the year-ago value to $149.44 million. Its operating income grew 303.6% year-over-year to $14.75 million. The company's net income surged 223.5% from the prior-year quarter to $9.94 million, while its EPS rose 230% year-over-year to $0.33.
AVD’s EPS is expected to grow 75% year-over-year to $1.12 in the current quarter. The consensus revenue estimate of $625.85 million in fiscal 2022 represents a 12.4% increase from the same period last year. The stock has gained 32.9% over the past year and 40.6% over the past six months.
It is no surprise that AVD has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock also has an A grade for Sentiment and a B for Growth and Quality. In the Chemicals industry, it is ranked #4.
Beyond the POWR Rating grades I have just highlighted, you can view AVD ratings for Momentum, Stability, and Value.
VHI shares were unchanged in premarket trading Thursday. Year-to-date, VHI has gained 69.61%, versus a -16.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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