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Industry Rank Analysis 5-18-11

I have written about the Chemical industry several times recently in this space, the last time being in mid-April. However, it continues to show up very well in the Zacks Rank. As the Zacks Rank is largely based on short-term changes (4 week) in earnings estimates, and by earnings surprises, the continued strength for the industry does represent new information.

Few firms had reported their first quarter results then, and almost all have now. The Diversified Chemical Industry, which I wrote about then, has since been joined by the Specialty Chemical industry near the top of the list.

The strong performance of the Chemical industry is a little bit counter intuitive, in that it is a huge user of Energy, specifically petroleum, and one would expect a margin squeeze from rapidly rising oil prices. It appears that demand is strong enough for Chemicals that the firms have enough clout to pass through the higher energy costs to their customers.

Chemicals go into a wide variety of products, and the strength in this group is a good indication of overall worldwide economic strength. I would note though that many of the integrated oil firms also have large Chemical operations, so strength in there and in Chemicals at the same time is not totally contradictory.

Zacks Industry Classifications

The Zacks industry classifications are very fine, with 256 different industries tracked.  It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts. It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the “industry.” 

Chemicals Getting a Positive Reaction

The Diversified Chemical industry is a large one. It has 32 firms in it, and many of these firms are huge, household names, even if their direct exposure to the customer is sometimes limited. A large number of firms makes it much less likely that the industry will end up o the top (or bottom, for that matter) of the charts. The industry is currently in 18th place, a deterioration of six spots from last week, with an average score of 2.38 up from 2.28.

The Specialty Chemical industry is also larger than average with 26 firms. It is currently in 22nd place, an improvement of 31 spots as the average Zacks rank has tumbled to 2.42 from 2.73.

Those firms tend to be more stable and less cyclical than the Diversified Chemical firms. The output of the Diversified Chemical firms tends to be measured in tons, the output of the specialty firms in pounds. The Diversified Chemical firms are often major suppliers to the Specialty Chemical firms. The specialty chemical firms tend to be smaller than the Diversified Chemical firms.

Strong Buys and Buys

The first table shows the Chemical stocks that hold the enviable Zacks #1 Rank (Strong Buy). The second table shows the Zacks #2 Ranked (Buy) firms. If the Zacks ranks were random, one would expect that only 5% of the firms in an industry would be “#1s” and 15% would be “#2s.”

That is not the case with these two Chemical industries. Eleven of them (19.0%) have number one ranks, and 22 (37.9%) have number two ranks. There is a wide spectrum of market capitalizations to choose from on the lists ranging from mega-caps like BASF (BASFY) and Dow (DOW), down to the tiny China Carbon (CHGI) and Flexible Solutions (FSI).

This is a worldwide industry, and several of the firms are ADRs. Valuations are for the most part reasonable, particularly if you are willing to look out to 2012 earnings. The estimates on these firms are rising, and an estimate in motion tends to stay in motion, so the true P/E on these firms might be lower than it looks based on current estimates.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Basf Ag-Adr New	BASFY	$83,003	10.12	9.23	7.59%	10.30%	$90.37
Dow Chemical	DOW	$45,017	13.25	10.99	12.60%	3.84%	$38.37
Sigma Aldrich	SIAL	$8,390	18.59	16.91	4.46%	4.53%	$68.88
Celanese Cp-A	CE	$8,056	11.85	10.49	9.11%	7.54%	$51.63
Huntsman Corp	HUN	$4,607	10.85	9.22	25.42%	16.57%	$19.14
Rhodia Adr	RHAYY	$4,588	8.29	N/A	13.86%	N/A	$44.25
Rockwood Hldgs	ROC	$3,840	14.23	12.1	25.26%	20.65%	$50.44
Kronos Worldwd	KRO	$3,133	9.6	8	28.83%	17.37%	$54.07
Olin Corp	OLN	$1,874	12.2	10.09	12.75%	9.10%	$23.52
Chemtura Corp	CHMT	$1,724	19.8	12.09	14.47%	15.06%	$18.02
Globe Specialty	GSM	$1,574	25.53	14.45	8.37%	4.83%	$20.93

Number 2 Rated Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Du Pont (Ei) De	DD	$49,014	13.74	12.11	4.05%	5.09%	$52.91
Air Liquide-Adr	AIQUY	$37,930	16.68	14.87	2.89%	3.46%	$26.69
Praxair Inc	PX	$31,225	18.86	16.5	0.65%	1.39%	$102.85
Lyondellbasel-A	LYB	$22,539	9.35	8.6	34.64%	31.82%	$39.68
Air Prods & Che	APD	$19,485	15.81	14.07	1.12%	2.09%	$90.66
Akzo Nobel Nv	AKZOY	$17,043	13.32	10.98	10.26%	15.15%	$72.99
Ppg Inds Inc	PPG	$14,242	13.55	12.36	2.84%	3.77%	$88.47
Ecolab Inc	ECL	$12,082	20.71	18.12	0.93%	0.84%	$52.07
Eastman Chem Co	EMN	$7,428	11.55	10.56	12.13%	12.21%	$104.55
Albemarle Corp	ALB	$6,255	15.71	13.54	7.42%	11.10%	$68.26
Grace (Wr) New	GRA	$3,218	13.16	12.57	12.70%	16.67%	$44.00
Methanex Corp	MEOH	$2,810	13.01	9.17	6.46%	9.05%	$30.31
Cytec Inds Inc	CYT	$2,728	16.16	13.57	1.84%	3.83%	$55.17
Newmarket Corp	NEU	$2,423	12.35	11.52	5.14%	8.25%	$174.77
Sensient Tech	SXT	$1,880	15.95	14.53	1.40%	1.27%	$37.60
Georgia Gulf	GGC	$1,004	13.22	9.08	2.19%	26.61%	$29.55
Innophos Hldgs	IPHS	$953	11.26	10.5	1.63%	2.26%	$44.36
Tpc Group Inc	TPCG	$632	17.48	11.7	0.00%	6.74%	$38.90
Quaker Chemical	KWR	$454	11.55	10.53	7.90%	3.60%	$39.45
Omnova Solution	OMN	$395	12.04	8.84	0.00%	0.00%	$8.73
Flexible Soltns	FSI	$29	34.17	18.64	20.00%	N/A	$2.05
China Carbon Gr	CHGI	$24	4.8	N/A	78.57%	N/A	$1.20

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
 
BASF AG-ADR NEW (BASFY): Free Stock Analysis Report
 
DU PONT (EI) DE (DD): Free Stock Analysis Report
 
DOW CHEMICAL (DOW): Free Stock Analysis Report
 
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