The chemical industry plays a fundamental role in various sectors, such as agriculture, healthcare, automotive, construction, electronics, and more. As a result, the industry benefits from a consistent and stable demand for its products, showcasing resilience even in the face of economic downturns.
Given the backdrop, I have highlighted three fundamentally strong chemical stocks Nitto Denko Corporation (NDEKY), NewMarket Corporation (NEU), and FutureFuel Corp. (FF), which could prove to be wise additions to your portfolio.
Before jumping into the fundamentals of featured stocks and explaining what makes me bullish about them, let us take a look at the factors that could shape the future of this industry.
The chemical sector is known for its focus on research and development. By fostering a culture of continuous innovation, the chemical industry continually generates novel and enhanced products, propelling the market expansion and fortifying its long-term outlook.
The chemicals market witnessed substantial growth, increasing from $4.70 trillion in 2022 to $5.08 trillion in 2023, exhibiting an impressive CAGR of 8.1%. Looking ahead, the chemicals market is projected to hit $6.85 trillion by 2027, growing at a CAGR of 7.8%, indicating sustained expansion in the coming years.
As the chemical industry is one of the largest emitters of carbon dioxide, environmental concerns and sustainability initiatives have led to a growing focus on eco-friendly and green chemicals, creating new investment opportunities.
In 2022, the global market for green chemicals was valued at approximately $1.70 billion and is projected to grow at a CAGR of around 8%-10% to reach $3.30 billion by the year 2030.
On top of it, the adoption of Artificial Intelligence (AI) is gaining significant attention in chemistry research. AI's predictive capabilities also extend to material costs, making manufacturing processes more efficient and reducing company losses. The global generative AI in the chemical market is expected to reach $1.42 billion by 2032, growing at a CAGR of 27.4%.
Considering the industry’s varied usage coupled with technology advancements and sustainable practices, the chemical industry should continue to be in a bright spot. That being said, let us now delve deeper into the fundamentals of the featured stocks:
Nitto Denko Corporation (NDEKY)
Headquartered in Osaka, Japan, NDEKY mainly engages in the adhesive tapes business in Japan and internationally. The company also offers functional thermal transfer systems, medical products, electrical and electronic equipment tapes, dust removal products, fluoroplastic sheets, tapes, porous films, and materials.
On May 31, NDEKY entered a partnership agreement with Crysalis Biosciences Inc. The collaboration aims to co-develop a bio-based solvent using plant-derived acetonitrile, aligning with NDEKY's commitment to carbon neutrality. Additionally, NDEKY will also make strategic investments in Crysalis to further support their joint efforts toward sustainable and eco-friendly solutions.
On February 17, NDEKY was recognized as one of the “Clarivate Top 100 Global Innovators 2023.” This prestigious list compiled by Clarivate Analytics highlights the 100 most inventive companies and research institutions worldwide.
Since its inception in 2012, this award is now celebrating its 12th year, and NDEKY was honored for the 10th time, which reflects its commitment to research and innovation.
The stock’s trailing-12-month levered FCF and ROTC of 7.54% and 10.44% are 112.3% and 70.7% higher than the industry averages of 3.55% and 6.12%, respectively. Likewise, its trailing-12-month ROTA of 9.46% is 102.1% higher than the industry average of 4.68%.
For the fiscal year 2022, which ended on March 31, 2023, NDEKY’s revenue increased 8.9% year-over-year to ¥929.04 billion ($6.70 billion). Its gross profit rose 11.6% from the year-ago value to ¥337.44 billion ($2.43 billion).
The company’s net income and EPS amounted to ¥109.26 billion ($788.20 million) and ¥738.48, representing increases of 12.4% and 12.6% from the prior-year period, respectively. Also, its operating income increased 11.3% from the year-ago value to ¥147.17 billion ($1.06 billion).
Analysts expect NDEKY’s revenue for the first quarter (ended June 30, 2023) to be $1.45 billion. Further, its revenue in the fiscal year 2023 (ending March 2024) is projected to increase 63.9% year-over-year to $6.68 billion.
Over the past three years, its revenue and EBIT have grown at CAGRs of 7.8% and 29.2%, respectively. While its net income and EPS improved at 32.3% and 34.9% CAGRs over the same period, respectively.
The stock has gained 35.9% over the past nine months to close the last trading session at $36.48.
NDEKY’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Value and Stability. In the 85-stock Chemicals industry, it is ranked #5. Click here to see NDEKY’s ratings for Growth, Momentum, and Sentiment.
NewMarket Corporation (NEU)
NEU engages in the manufacture and sale of petroleum additives. The company provides lubricant additives for use in various vehicle and industrial applications, engine oil additives, and industrial additives designed for products for industrial applications and industrial specialty applications.
On July 3, the company paid its shareholders a quarterly dividend of $2.25 per share on its common stock, reflecting an increase of $0.15 from the last quarterly dividend of $2.10 per share.
NEU pays a $9 per share dividend annually, translating to a 2.06% yield on the current price level. The company’s dividend payments have grown at a CAGR of 4.1% over the past five years, and its four-year average dividend yield is 2.17%
NEU’s trailing-12-month ROCE and ROTA of 40.05% and 13.52% are 275% and 188.7% higher than the industry averages of 10.68% and 4.68%, respectively. Likewise, its trailing-12-month levered FCF margin of 6.85% is 92.8% higher than the industry average of 3.55%.
During the first quarter that ended March 31, 2023, NEU’s total revenue increased 6.1% year-over-year to $702.79 million, while its gross profit rose 27.6% from the year-ago value to $198.04 million.
In addition, the company’s net income improved by 64.5% year-over-year to $97.58 million, while its EPS amounted to $10.09, reflecting an increase of 75.5% from the prior-year quarter. Also, its EBITDA came in at $155.89 million, up 40.6% year-over-year.
NEU’s revenue and net income have grown at CAGRs of 8.2% and 4.6% over the past three years, respectively. Also, its EPS increased at a CAGR of 8.9% over the same period.
Over the past year, the stock has gained 46.9% to close the last trading session at $437.60.
NEU’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Value, Stability, Sentiment, and Quality. Within the same industry, it is ranked #3. Click here to see NEU’s rating for Momentum.
FutureFuel Corp. (FF)
FF manufactures and sells diversified chemical, bio-based fuel, and bio-based specialty chemical products in the United States. The company operates through two segments, Chemicals and Biofuels. Its product portfolio includes various custom chemicals used in coatings, chemical intermediates, industrial and consumer cleaning, oil and gas, etc.
On January 4, FF declared a regular quarterly dividend of $0.06 per share to its shareholders, payable on September 15, 2023, and December 15, 2023. The company’s annual dividend of $0.24 translates to a 2.55% yield on its prevailing prices, while its four-year average dividend yield is 17.50%.
The stock’s trailing-12-month ROCE and ROTC of 17.08% and 9.94% are 59.9% and 62.4% higher than the 10.68% and 6.12% industry averages. Likewise, its trailing-12-month ROTA of 13.04% is 178.6% higher than the industry average of 4.68%.
In the fiscal first quarter that ended March 31, 2023, FF’s revenue increased 76.3% year-over-year to $74.16 million, while its gross profit came in at $21.62 million.
The company’s net income and EPS amounted to $21.08 million and $0.48 compared to a net loss and loss per share of $12.39 million and $0.28 in the prior-year period, respectively. Also, during the same period, its total current assets stood at $291.49 million, up 6.5% versus $273.78 million as of December 31, 2022.
The company has an impressive earnings surprise history, surpassing the EPS estimates in three of its trailing four quarters. In addition, its revenue has grown at CAGRs of 26.8% and 9.1% over the past three and five years, respectively.
FF’s shares have gained 44.8% over the past nine months and 39.1% over the past year to close the last trading session at $9.40
It’s no surprise that FF has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has a B grade for Growth, Value, and Quality. Out of 85 stocks in the same industry, it is ranked #4.
In addition to the POWR Ratings we’ve stated above, we also have FF’s ratings for Momentum, Stability, and Sentiment. Get all FF ratings here.
What To Do Next?
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NDEKY shares were trading at $35.83 per share on Wednesday afternoon, down $0.65 (-1.78%). Year-to-date, NDEKY has gained 24.71%, versus a 19.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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